The new hallucination for most strapped McMansion owners is that they'll "rent the house for a year and then sell when the market comes back."

The happy theory here is that, yes, prices are temporarily depressed, but when the green shoots really take hold, we'll go roaring right back to 2006 levels again.

Most real-estate agents will be eager to tell you that they agree with this theory. What they won't be able to tell you, as Mark Hanson of the Field Check Group points out, is why.

Even after a 30% fall from the peak, house prices are still too high. Meanwhile, millions of homeowners are losing their jobs, consumers are still saddled with truckloads of debt, banks are still tightening credit, foreclosures and delinquencies are still soaring, mortgage-mods are a failure, there are still too many houses on the market, wages are declining, taxes are likely to go up, and the economy is likely to struggle for years.

In short, it's likely that house prices will now crash below fair value and remain below it for years. So McMansion owners sniffing at current prices and planning to "wait until the market comes back" will likely be waiting a lot longer than they think.

Mark Hanson thinks the next segment of the real-estate market to crack will be the mid-to-high end (big houses in prime locations). Why? Because so far, those who forked over more than $1 million for their houses have resisted reality more successfully than the folks in lower-end housing brackets, where rampant foreclosures have driven prices down. But that, Mark says, is about to change.

More evidence for this view comes from southern California, where Jonathan Lansner has written up the latest sales figures for Orange County. Note that inventories have shrunk considerably in the low- and mid-tier brackets, which is a good sign (it means the market in these segments is close to equilibrium). And then note that months-supply for $1+ million houses is still a whopping 13 months--which means no one is paying what McMansion owners are asking.

Big price cuts on McMansions coming soon...

Jonathan Lansner: The latest reading on the Orange County housing market from Steve Thomas at Altera Real Estate, with data as of last Thursday …

After rising much of the year … demand, measured as new pending sales in the past month, dropped by 23 in two weeks to 3,629. Demand is +623 vs. year ago.

Inventory of homes for sale dropped by 125 homes in two weeks to 9,188 — lowest supply level since February 2006 and down 5,652 in a year.

Expected market time — how long it would take to sell current inventory at the recent sales pace — dropped a smidge in two weeks to 2.53 months vs. 4.94 a year ago. Market time was last this low in September 2005.

Thomas says: “Typically at this time of year demand reaches a plateau and begins to drop a bit in July before increasing one last time for the year in August.”

And a look at how price matters, in terms of Thomas market time …

For under a half-million, it theoretically will take 1.58 months to sell off all inventory.

Half-mil to $1 million? 2.75 months.

If it’s a 7-figure listing, it’s 13.08 months.

See Also: The New Homeowner Hallucination: "We'll Rent For A Year And Sell When The Market Comes Back"