Expect a 32% Drop
It's been argued here and elsewhere ad nauseam that you can expect a 30-40% decline in house prices post-bubble. Here it is argued that the correct expected value is a 32% drop:
If the housing bubble follows the historic pattern of other bubbles--and there is no reason to suspect it will deflate any differently than other bubbles--we can forecast a rapid decline to the underlying trendline. And what is that trendline? If we draw a simple line from 1970 to the present through the median home price in the U.S. (not adjusted for inflation), we see that the 25-year period from 1970 to 1995 follows a very regular trendline, despite the soaring inflation of the early 1980s.
We can see that the appreciation of housing was already above the trendline in 2000, reflecting the general euphoria and asset-appreciation of the go-go late 90s. But the real violation of the trendline has occurred since 2000. The trendline suggests that the median price of a house will fall from $214,000 to about $145,000 in the next few years--a 32% decline.
There is other evidence to support this valuation target. If you consult the inflation calculator on the Bureau of Labor Statistics page, you'll find that inflation has risen from 1990 to 2006 by 52%. That is, $1 in 1990 is worth $1.52 in today's currency. (Never mind inflation has been understated for years--that's another story I've covered elsewhere.) That means the median house price of $95,500 in 1990 would equal $145,160 in today's money--remarkably close to the trendline prediction of $145,000.
Since the median price of a house in California is $535,000, we can extrapolate a 32% decline to $365,000 as a post-bubble target.
This isn't what the real estate industry wants to hear, but the charts are rather persuasive.