This post is actually, this is an expansion from the comment I put on Andrew Lenza’s splendid blog: “What if the Real Estate Market isn’t Local and I’m Selling Bunc.” If you haven’t read it – you should.
I like to create metaphors out of things that I love. I love real estate and I also happen to love fine coffee. There is some Cuban/Spanish blood in my veins – so I guess that’s where the caffeine addiction comes from – and my coffee analogy of local real estate markets.
I agree that the monetary system is a mess - the liquidity crunch is real and that impacts everything to one extent or another. But, how much that actually impacts housing prices is determined locally.
Living in Westchester, NY. If you are 20 miles outside Manhattan - things are still pretty liquid because there are enough people with a ton of money out there. Prices have moderated in that they no longer are escalating at double-digit rates, but there aren’t any signs that they are going to drop like a stone either. Yesterday, yet another article in the New York Times confirmed that the New York City market is in a sweet spot with an article by Christine Haughney. The New York City market is a seller’s market – due to the favorable exchange for foreigners. For these buyers a low dollar means bargains – even at sky high prices and New York, being what it is continues to be a very desirable location to own real estate. The Westchester market shines warmly in the light of the New York City market.
Using the coffee analogy, let’s compare the Westchester, NY (venti caramel macchiato) market to the market 300 miles northwest of White Plains, Fulton, NY. Just recently I had the thrill of introducing a new dog, Tundra, to my canine "family.” I went to a breeder who I know and trust way upstate in Fulton NY. Fulton is above Syracuse and is a small town surrounded by country homes and farmland. Syracuse is just a few miles south. The breeder’s home is almost exactly 300 miles from my home in White Plains, NY. Five hours by car (ROAD TRIP!!!) and just about a couple of worlds away. 
The currency is the same – the monetary system is the same, but the prices aren't. You could spend up to $6.00 for venti latte from Starbucks in Westchester. I didn't look for one, but I doubt that I could even find a Starbucks in Fulton (although there were some on the Thruway near Syracuse.) The point is that no one is spending that kind of $$ on coffee in Fulton, NY. The same holds for real estate. No one is paying $650,000 for a starter home on 0.12 acres in Fulton, NY. You could probably buy a mansion for that kind of money up there. After all, you can buy a storefront property with rentals on the second floor for about $90k in nearby Oswego - try doing that in Westchester - you'd be laughed at. The market in Fulton and Oswego resembles “coffee regular” that you can buy on any street corner in most cities for under $1.00.
Nothing is going to change that dynamic. I remember being on Zillow a couple of months ago reading a posting by a “buyer” who was literally waiting for housing prices to fall to levels resembling what is currently available in Boise Idaho. The only problem was tha he wanted a house in San Francisco. Someone suggested that if he wanted a house that size he more to Boise. His reply was that San Francisco is “where its at!” The problem for him is that many other people feel the same way. The prices aren’t going to bottom out in the way this buyer (chronic renter) is hoping – liquidity issues not withstanding.
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