30, 40, 50% drops sound a bit chicken littleish to me, but I do think that real estate is primed for more fall - particularly if the economy softens.

You posted some very startling numbers there, though they're numbers I think most of us are at least vaguely aware of.  I'm buying Cleveland is all I have to say. My family is actually from Ohio, so even those numbers I was sort of aware of.  I guess it's one thing to think of selected overheated markets (think New York 1970's) dropping 30%, but the real estate market overall - that's hard to imagine.

Why?  Because real estate is a little different than most other investments. We actually have to live in our houses, and the decision to buy and sell them takes the odd investor behaviors we see otherwise and cranks them up a notch.  So when someone really wants a house, they're more likely to outbid the offer, and when they've got to sell, they're very reluctant to take a loss.  So the upside can be amplified and the downside is definitely dampened by the fact that these are our houses we're buying and selling.

Essentially the price of a house comes out to just about what people can pay, monthly.  The NY Times did a great story 3 or 4 years ago that showed that real estate prices corresponded almost exactly to median income per month, with housing prices moving up as interest rates moved down to set that monthly payment for a house, which is what people can afford and then buy.

It's a little different than in a country like Spain (and much of the rest of the world) where almost all mortgages are based on variable rates.  In that case, if rates really move up, there can be a huge squeeze, though again, the underlying dynamic of average wage buying an average house does not disappear, but there's more likely to be more short-term repo pain.  In the U.S., with fixed rates, as long as you keep your job and don't suffer a financial catastrophe, you should be OK.

All of this is just to say that if the real estate market collapses, at or beyond the sorts of levels that Matt describes, we'll have a lot more serious issues to worry about than how much our house is worth.