When it comes to market bubbles, especially in markets as illiquid as real estate, the old rule holds true:

"Things are easier to get into than out of."

There are going to be some real bargains available in housing over the next few years. Desperate sellers without any equity remaining and without enough disposable income to meet their monthly payments will walk away from their homes. Fannie and Freddie will have to auction off these abandoned, repossessed houses. This will put downward pressure on the market value of homes.

When people lose their home equity and are forced to move, where will they move to? Rented housing. They will strive not to move more than one rung down.

The 1,700 square foot, three bedroom, two bath home is the minimal home that a middle-class American wants to live in. When this kind of home comes onto the market as a foreclosure, it’s time to start negotiating.

As for homebuilders, they are the classic victims of optimism during the boom phase. When they can’t move their inventory, they have to sell. They have few reserves, and interest costs eat them up. If you want to buy a new home, bide your time. There will be plenty of them available at fire sale prices in a year.