I agree with most of what you have stated as being the most logical and likely progression of housing prices. But the stickiness of prices on the way down has been very strong, and could delay price “equilibrium” for some time. Clearly the must sellers are going to be “very motivated” , but a lot of the market will hold out for years – either staying put, or turning their old house into rentals.

The worm in the apple is demand. There are at multiple people who would like to buy (almost) every house. Items 1 through 12 put limits on the effectiveness of the demand (who can or will buy at what price) but the demand is still there. There will be buyers at each price reduction, not as many as at the height of the frenzy, but buyers creating new “stable” comps.

I have two coworkers who have been waiting to buy a house for years, and now can afford something. One has just closed, and the other is looking hard to find a place “before the price goes up again”. They are both educated enough to understand the likely down trend in prices, but they choose to ignore the obvious to pursue their “dream of owning a home”. This type of thinking, along with the “prices will be back up in a few years” from potential sellers could create a real delay in prices reaching any economic value type of price point.

I knew that prices would reduce quickly after 1st quarter 2006 (when I sold my house and moved to my boat) but the robust nature of the Ca housing market fooled me. Now that I expect prices to decline slowly over the next 3 – 5 years, maybe I will be wrong – again.