Stan, There is nothing psychological or behavioral in a credit crunch. For example (very oversimplified, still illustrative):
case 1: Your case: 100K income supports 350K house price. No problem.
case 2: 200K income. supports 700k house price. The potential buyers save up 140K (20%). Find the 700K house. When they search for mortgage, find none. Pick up a mortgage for 417K, try to transact at 557K.
What happened? Well the 700K house got devalued to 557K. Why? Because, this model applies to everyone in that resource universe. Since there is no competing offer, the seller has to reprice it to 557K to sell or he has to take it out of market.
Unlike conservation of matter and energy, there is no such thing as conservation of value. Value is whatever the potential buyers think it is. When they can’t get enough funds, the asset automatically devalues or goes out of market.
