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I am consistently amazed by the power of the human brain, mainly as it relates to psychology. The brain is powerful enough to cause people to hallucinate, to create an unreal reality, and, even more impressive to me, to completely blind people to the reality right before their eyes.

I just returned from a 10-day road trip across the southwest. Nearly everyone I talked to acknowledged the weakness in real estate with one caveat: the high-end is insulated from the problems plaguing the low-end.

I picked up a real estate rag in San Clemente while I was camping down there. On a single page there were half-a-dozen, bank-approved short sales. The process of people upgrading to larger, more expensive homes is dead. The banks are the only ones moving up the real estate food chain right now (and not by choice – they’d much prefer their loans to perform).

Everyone and their mom should also know by now that the market for jumbo loans is completely non-existant. For mortgages over the conforming limit of $417k there are no buyers. Only those paying cash can afford to purchase multi-million-dollar properties right now. You simply can’t remove demand (buyers who need financing) without a severe impact on the market (high-end real estate).

To believe that the worst foreclosure epidemic that perhaps the country has ever seen combined with a frozen mortgage market will leave high-end real estate untouched is the height of lunacy. Maybe not lunacy. Maybe – just maybe – it’s an extension of the denial that led people to believe there was no real estate bubble in the first place.

Still, the power of the sustained disbelief is truly amazing.

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