1) One part of the story that does not get much play is the demographic story on real estate. (Note graph on the left.) Baby boomers will try to cash out of homes to fund their retirement. Now, that effect will vary by region, because oldsters will want to live in warmer or drier climates. Perhaps apartments in Florida, the South and the West will benefit, as homes in the Midwest and Northeast languish. Then again, at least in the Midwest, it would be cheap to live there, as well as less popular areas in the South. Perhaps we should turn New Orleans into a haven for retirees. 
2) Housing prices down by another 25-30%? Sounds too severe to me, but markets do overshoot, particularly illiquid markets.
3) Even when recourse is available, lenders often find it not worth their while to pursue those who “mail in the keys.” There are many who are giving up on their homes, and rationally so, because they know that the home is beyond their means. They may have known it from the time they took out the loan, realizing that they got a lot more house than they ever dreamed of. Well, we wake up from dreams and face reality. Given the slipshod nature of the lending, many banks will not pursue for recourse. You can’t squeeze blood from a stone.
PS — I should have a post tomorrow on the portfolio reshaping.
I saw that graph too in the last day or two. OUCH is what went through my mind.
It might be rational for people to default in order to cut their losses but if hanging on is a possibility it seems more ethical to me.
When the depression hit my great grandfather refused to withdraw his carefully set aside savings. He said basically that if everyone did it, the economy would crash. He lost his savings of course. I am not that extreme.
The reason for the 25-30% forecast (which I concur with) is the combo of lost jobs, no savings, negative equity, and supply/demand imbalance for homes. You add all these into the mix and you ge a huge decline in value, plus an added kicker. The added kicker is some kind of bailout as mentioned by Kass, dodd, etc today. We will end up with some sort of bailout which will tell all those that havbe saved some money and play by the rules the they are the screwee. the only option will be to walk away and start over and play the game. If you bought a $600,000 house in CA with 20% down, you are looking at a $480,000 house, for example that has $120,000 of your money. You’re paying interest on monies that do not exist today. I think a number of these people will take the jingel mail alternative as the banks will probably not go after them.
Coupled with the demographics is the reality that homes (prices) will not be growing at 5%-10% annually. No longer seen as an investment, but more of an expense, will further dampen speculation. A new, more sober era for housing is on the horizon…and that is good for our country’s overall economic health and vitality.