As I mentioned in a prior note, house prices may be dropping in ways that are not picked up by price indices because the indices all use the contracted sale price. Currently sellers are using a variety of kickbacks that reduce the effective price below the sale price.
Today's Washington Post has a good example. Centex, a major national builder, has a full-page ad (sorry ads don't appear in the web edition) offering mortgages at well below the market rate, plus closing cost assistance. (The difference on the 30-year is about 0.8 percentage points.) The ad also promises realtors a $5,000 bonus. So, on a $400,000 home, these incentives could easily come to 5 percent of the purchase price.