Not everyone is underwater. Consider what I call the ‘lottery winners’, people that have just received a large inheritance, vested a bunch of options, or even indeed, won the lottery. How is buying an overpriced home any different than buying any other overpriced asset in these cases? Sure, its a lousy investment, but maybe they are buying it just to live in!
There will always be enough folks out there, even if credit dries up entirely, to buy homes. *Thats* the fundamental that will drive the deflation of the housing bubble and return the market to equilibrium.
Once all the desperate/forced sellers realize they will have to drop their prices, in some cases drastically, in order to attract what few buyers there are out there, will prices come down.
