Market value in real estate is defined as the price which a willing buyer will pay and a willing seller will accept, neither one being under undue pressure.
There is no doubt that many properties are overpriced in this market, but many are priced correctly, and some are priced below market value. Every day many homes are purchased in California by willing buyers. Many times the sale prices are lower than the list prices, sometimes the sale prices are higher than the list prices, but in virtually every case, the sale price is consistent with market value because the three necessary criteria are met - willing buyer, willing seller, no undue pressure. Homes that are over priced tend to not sell, or eventually sell at lower than market value (because at some point the seller is under undue pressure to unload the property).
Market value falls when willing buyers, as a whole, deem that prices are too high and they do not offer to purchase. Market value rises when willing buyers, as a whole, deem that prices are low and they overbid because of competition from other willing buyers. When an individual deems that prices are too high, as you have, market value is not effected. Rather, that individual moves from the "willing buyer" category to the "non buyer" category. If enough willing buyers join you in the non buyer category, prices will fall.
Real estate is local in nature, and California is a big place. There are many factors that influence value on a local level. The quality of local schools and perceived safety of neighborhoods are two of many factors that influence how much willing buyers will pay for real estate. A house in Cupertino will sell for a much higher price than the exact same floor plan in East San Jose, for example, even though those two areas are only about ten miles apart.
California is a non-judicial foreclosure state, so the backlog of foreclosures that you reference in the courts has a minimal effect here. If the market does get flooded with foreclosed properties that will likely have the effect of driving prices down. For this reason, the foreclosing entities may "meter out" these properties to avoid a flood on the market. You are correct that high inventory tends to have a negative effect on property values, which is good for buyers, of course. In Santa Clara County, inventory is certainly higher than normal, but it is not at a record high. In the past four years, inventory has been higher than it currently is in at least 15 months. I do not keep track of state-wide inventory levels (real estate is local, I focus on the local area that I serve), so you may be correct about inventory in the state being at record levels.
I hope this helps you to understand the dynamics of the housing market; I wish you the very best.
