Raybyrnes, you are ignoring the most important aspect of housing prices – They are set on the margin. It doesn’t take very many transactions to set comps.
It doesn’t matter what “most” people are able do (hold on, rent out, etc). If 100% or 50% or even 25% of all real estate changed hands in a year, the distressed sellers would be only a small fraction of overall sales and would not have a big effect on prices. However, total sales in year, as a percentage of all housing, is quite small. Therefore, distressed sellers, as a percent of all sellers, can be quite large. This has a big downward effect on prices.
