Housing Bubble Update - worse than it appears

This is an anecdote - but I think it is very indicative.

Friends of mine own a house in San Carlos. They paid ~$650K for it. In March they bought a bigger home for a lot of money on an interest only loan. They began selling their first home.

MARCH - MAY: BUYER? WHAT BUYERS?
The house was listed at $950K, what the comps said it should be. At the time there were only 2 houses <$1M on the market in their area.
With limited inventory, they were counting on a fast sale. In fact some 50 people came through to look. Not one offer was made.

Eventually an offer was made and accepted for ~$900K.
Meanwhile, they have had to spend ~$4K per month out of pocket for the mortgage which is now no longer tax deductible.
Total profit: $900K - $12K in mortgage payments - $54K real estate agent commission -$650K original purchase price = $184K

JUNE TROUBLES
The buyer backed out.
My friends have re-listed the house for $850K. They deliberately selected a lower price to try and bring in more buyers and create a bidding war to get them >$900K.

They have received a few offers BELOW ASKING.
Meanwhile, they will expect to pay another $8K for 2 months of mortgage (this month and a 30 day escrow).

At the same time, inventory has skyrocketed. There are ~30 houses now on the market in their area at or around the $850K price. Many of them are in nicer locations or are nicer homes. For an extra 10%, significantly better houses can be found.

This is in the middle of prime home buying season, and they are selling below the comparables, and they still can't unload their house.

CONCLUSION
My friends have dropped the price 12% and incurred a further 2% cost due to the 5 month sales cycle. They have been following the standard methodologies: prices based on comparables and housing appraisals.
They must sell, they can not rent and cover costs. If they are able to sell for $850K, their net will be $128K ($52K sales commission, $20K mortgage, $650K purchase price). That's a great profit.

But it is also a hell of a lot less than the expert real estate professionals told them to expect.

1. Housing prices are coming down dramatically - another 5% for May/June is my expectation. that would make the Year-over-year prices negative for the first time.
2. Predictions are off - prices are plunging faster than experts expected.
3. Sudden changes - the swiftness of the price drops is illusory. The April buying figures showed a 7.3% drop in prices versus March. In reality, April reflects housing activity from February and is therefore the first report for this year's homebuying season. Look at interest rate changes over the past 12 months (5/1 ARM).
June 2005 5%
Sept 2005 ~5.3%
Jan 2006 5.7%
June 2006 6.3%
In 12 months, the cost of money is up 26%.
In 5 months, it is up 12%
From the end of the last housing to the beginning of this one, the cost of borrowing is up 20%!
Prices had to come down to reflect the higher costs of borrowing. And they had to come down quite a lot.

As house prices come down and this is this becomes the expectation, more buyers will stay out of the market and more sellers will come into the market.

This will be a vicious cycle accelerating as September arrives.