I may not be a economist, but I am in the trenches selling real estate in Cleveland. I have never seen so many vacant and foreclosed homes in my 23 years of selling. I am a full time agent and this is my only form of income. The market is brutal. We need to reinforce rules of the industry more than ever before.
It is also very important to understand that there are two markets out there. The foreclosure market where you may get a really great deal or end up with a money pit. Many of these foreclosed homes have been sitting vacant for years. The plumbing has been ripped out. Electric has been vandalized. When you buy one of these you don't really know what you are getting yourself into. If the property has sat through a winter with no heat it is no telling what hurdles you will face getting the property to good condition.
The other market that is out there is the lived in resale that has been cared for and updated. Many of these are in absolute mint condition. These homes are selling! They just aren't getting 2005 prices!! If you buy one of these homes you are not missing out on the deal of the century. You are getting a home in prime condition that hasn't increased in value over that last 3 years. Maybe it even decreased as much as 10%. The important thing to realize is when the market rebounds. Historically values start to increase again. So whether you are buying as fixer upper that you will put thousands of dollars into or getting one that is in prime condition you will still come out ahead in the long run.
The other dilemma is selling a home in this market and then buying. If you are buying a bigger home you will take a small loss on the selling end of your home but you will make up for it on the purchase end. Like transferring stock at a down period but purchasing one that has a greater opportunity to increase in value.
It is a tough market. Hopefully all the part time nonprofessionals will get out. Real Estate is still the best investment. You can live in it,write off the interest and taxes, and earn money by paying down your mortgage and during times of inflation your value grows.