It seems common sense that the reason real estate prices drop is because there is too much supply and limited demand. BUT WAIT!! There are other factors at work behind the scenes.
The housing market is not like your average retail store that puts products on the shelf and offers advertised specials.
One way prices drop is when property is sold privately off the market. Believe it or not, some sellers would rather have either a private party buy it under market. This private party could be a family member or a friend, or maybe they have a friend in real estate who has a buyer "in their pocket" who wants a great deal. When a home sells off the market it is a comparable sale for the entire neighborhood.
Desperate sellers also bring prices down. These days many desperate sellers are banks that want to cut their loses by selling properties below other listings. Not all banks are doing this type of fire sale of property, Ironically, as long as the property is listed on the market often times buyers bid up the price. I showed a few bank-owned new listings this past weekend that had multiple offers by Monday.
Short sales prices are even lower than foreclosures in many cases. Some banks don't want to gamble with prices or the condition of the property in the future if they take the home back through foreclosure. Some banks cut their loses before the owner has even moved out of the property. Short sales are not for every buyer. Generally there are months of waiting while the banks go through their approval process.
The housing market is very volatile right now. For sellers, the best chance of getting the highest price is to price your property below other competing listings but make sure it is marketed heavily so buyers and other agents have the opportunity to see it.