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Part of the recent runup in prices was due to bubble behavior in lending, and due to Mexican illegals buying houses on no-doc lending .....

Illegal Mexicans, anybody with a pulse and even some documented cases of people without pulses.

Loan brokers generated worthless mortgages to SELL to gullible Wall Street investors.

The worthless mortgages included not only Mexican illegals but solid middle class folks with good middle class jobs that bought $400,000 houses with $800,000 of borrowed money that they could never afford to repay once the "interest only" grace period expired.

Three years ago, FR real estate threads were flooded with such people.

They all claimed that the worst that could happen was that, once the "interest only" grace period expired and their income did not magically jump to make principal PLUS interest payments possible, they would simply sell the house for a cool $1 million and laugh all the way to the bank.

Yup. Had a few exchanges with folks who believed that their house were located in Naples FL. or Los Angeles, or wherever, that a house that was not affordable was not affordable and the sooner of later, there would be a reversion to the mean.

More recently, I had a conversation with a good friend from Yorba Linda CA who had advised that I purchase a house immediately in mid 2006. This August, he was lamenting that his ["can't lose"] house was dropping in value at about 20K per month.

Houses should not be considered to be investments in the usual sense. If you are in a good area, buy at a reasonable price / opportune time, and the USG continues to debase the currency, you will come out better than if you have rented on average ... and if you are wise enough not to become entangled with a home owner's association, you might actually gain a measure of freedom by owning rather than renting.

However [big time] even with tax breaks, in the words of Robert A Heinlein, there is no such thing as a free lunch.