The LA Times reports on one town where the housing bubble has burst. "Merced, CA. Where did everyone go? Real estate agent Mark R. Gregory is holding an open house to sell a nearly new three-bedroom on a corner lot, and it's as if the Earth had been emptied. Last year, this Central Valley city enjoyed the state's hottest real estate market. Three hours quietly pass. At 4 p.m., the agent pulls up the sign and locks the door. Total visitors: zero."

"'It's like everyone got together and said, 'Let's not buy for a while,' Gregory says."

"The good times have already ended here, in the same way slamming into a wall reduces your speed. A house will fetch 20% less today than it did last summer, brokers say, assuming it finds a buyer at all. Just a little while ago, Merced was an investor's dream. Prices in the city and surrounding area increased 31% in 2005. First in price appreciation in California and ninth in the nation. That already feels like ancient history."

"(Economist) Andrew Leventis contemplated this ascending arc in a region that is not a tourist destination or retirement haven, where incomes are not growing and unemployment is perpetually high. He then used an un-economist word: 'Shocking. It's difficult to know what was driving these high rates of appreciation,' Leventis said."

"To people in Merced, however, there's little mystery. This was a classic bubble, where people paid increasingly higher prices because they were sure that someone would come along and pay even more. Economists call this the 'greater fool' theory. In 2003 and 2004, carloads of investors would come down from the Bay Area and up from Los Angeles. They would see a $200,000 house and say, 'Wow, if this were on the Westside or in Berkeley, it would be worth $750,000, easy. Let's offer $225,000 to make sure we get it.'"

"Then the seller across the street would say, 'If that place was worth $225,000, I'm going to ask $250,000.'"

"'The demographics never changed here, but people bought as if they did,' said Ray Rodriguez, president of the Merced County Assn. of Realtors. 'It got real wild.' Then last September came, when the first portion of the university opened. 'The market shifted in two weeks,' said Gregory, the agent. 'All of a sudden, nothing.'"

"Officially, this city of 77,000 has 640 homes for sale, about 10 times as many as last summer. But agents say that if you add homes for sale by their owners, new homes being sold by builders and the dwellings that would-be sellers have pulled off the market in despair, the real number is at least twice that. The Merced Sun-Star's Sunday real estate supplement has 40 pages of ads."

"Many of those ads are for new developments. The city lists 47 active subdivisions where 7,173 homes are going up. For builders with excess inventory, it's let's-make-a-deal time. At the sales office of Shadow Creek, signs on the front door and walls proclaimed: 'Ask us how to save $40,000 off a new home!!!' 'If you want to ask for more, just do it,' the saleswoman advised. She said a $60,000 break would probably be fine."

"Ryan Burchard, a San Luis Obispo radio host, examined one of Summer Creek's model homes. 'Some of these salespeople seem a little jumpy, a little desperate,' he said. 'It's like walking onto a used-car lot.' 'Every other house here is for rent,' he said."

"Brenda Rodriguez (and) her husband were able to buy a place in November through a county program for low-income families. The house has its problems, but she's glad to leave renting behind. 'A house is something you invest in, it belongs to you,' she said. 'You hand it down to your family. Renting is just throwing your money away.' Merced is going to grow, Rodriguez said, which means house prices will keep going up. And if they don't? 'Then I'm screwed.'"

"Many homeowners have been treating the equity as if it were income and spending it. In Merced, they would go down to the car dealers even before their refinancing cash-out check came through. Before the escalation began, 8 out of 10 home buyers in Merced County got a fixed-rate loan,. By last summer, 80% of buyers in Merced got adjustable-rate loans."

"The only thing worse than the real estate market here is the market for real estate agents. They've been coming down to the Auto Toyz and Auto Store used-car lots looking for work. 'Everyone who applied recently, about eight people, they all were Realtors,' said Nico Pineda. 'But things were slow for us, so we had to turn them down.'"

"This is a very good time to be a renter in Merced. A new $450,000 house, owned by an investor waiting to flip it, can be had for less than $1,000 a month."