Houses are still 5 times what they cost 40 years ago. Housing prices will have to fall an awful lot before things get as "bad" as they were 40 years ago.
There can be no arguing the fact that, for most Americans in most states, owning a home is a good investment. You have to live somewhere, so why not take the money it would cost to rent (after taking the mortgage and property tax deduction) and buy a house? It's better than putting it into just about any other ordinary investment (even gold!) and you get to live rent-free.
Where the whole house of cards begins falling apart, unfortunately, is when you have new buyers -- a working couple in their 20s, for example -- signing up for a variable-rate, or worse, an interest-only, loan that they barely qualify for. Minimum down payment, no other assets but a car (which is financed, also) and a baby or two on the way or planned.
Should the husband or wife lose his or her job, they won't be able to make their house payments. After six months, the lender will foreclose. The house may have increased in value, but don't expect the poor couple to benefit from that after it's foreclosed on. And don't expect the bank to put any money into as much as cosmetic improvements once they get title, because banks don't do that; they just want to get it off their books.
So, a house that's worth maybe $300K will go on the market for $275K and sell for $270K, leaving the bank whole but the former owners wiped out. They won't be buying again soon.
Multiply this scenario by literally hundreds of thousands and you understand why it is that home prices can take a dip, even though, as you say, they are way above what they were 40 years ago.
It's just that only a small fraction of the population has been in their home long enough to realize that kind of gain.
If Housing drops even 10% thats huge to someone who wants to move. If they buy a $1 Million dollar home and can only sell it for $900,000 they owe $100,000 or they just can't sell.
Its this factor that keeps the housing bubble from busting. People cant panic because they can't pony up the money for the loss.
"The price of existing homes last month fell 2.2 percent, the largest monthly decline in the almost four decades the number has been tracked."
Could that be because they were unreasonably over priced to begin with?