Not to mention the fact that if you should ever decide to sell the house, it’s better to have bought low than to have bought high.
So, if you buy the house at $800K and find that it can be sold for only $640K in 2-3 years, you’re going to be upside-down mightily if you only put in 5% down, even if your monthly payment is the same if you buy it at the lower price. This might not hurt you if you’re planning on staying in the house another ten years, but who knows where you will find yourself at that point.
I’m also not convinced that housing prices are going to drop 40-50%, but it’s certainly within the realm of possibility, and if they drop 20% in 2-3 years as you propose, there is no reason to think they won’t continue to slide. I wouldn’t put my money into a house in San Diego right now unless I had 1) strong personal reasons to buy (i.e., kids and a very strong desire/need to make a stable home for them), 2) very high job security, and 3) fairly definite knowledge that I wouldn’t want or need to move for at least 8-10 years.
