Could the correction be even more severe?

From U.S. News:

Housing bubble correction could be severe

Contrary to popular belief, the housing market hasn't cooled off that much. In fact, residential real estate prices continue to soar in a number of key metropolitan areas, according to a new study released this week.

That's a good thing, right? Actually, no–because the froth building in housing prices raises the distinct possibility of significant corrections to come in many of those regions.

In the first quarter, home prices nationwide rose an additional 7.3 percent, according to a joint study by the financial services firm National City Corp. and the research firm Global Insight. As a result, there are now 71 metropolitan areas–representing nearly 40 percent of all single-family homes–that can be classified as "extremely overvalued," according to the study. By comparison, only 64 metro regions were considered frothy at the end of last year and only 1 percent were classified as such in the first quarter of 2004.
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Under normal circumstances, the fact that housing prices are continuing to rise would be something to cheer. But the housing boom has been going for most of this decade. And housing markets can't be overvalued for too long, as imbalances in residential real estate prices will eventually lead workers to relocate to more affordable cities.

The bottom line: Real estate prices eventually correct themselves. And unfortunately for homeowners, it often takes years before home prices start to rise again, especially after a big run up.

National City recently studied 66 major metro regions over the past 21 years that suffered through a 10 percent or greater decline in prices for at least a two-year period of time. It found that home prices, once they begin to correct, tend to decline 17 percent on average before markets heal themselves.

"And the average duration of these adjustments is 3.5 years," says DeKaser.

So what about families who recently bought into one of these "extremely overvalued" markets in hopes of turning a fast buck? "I extend them my deepest sympathies," says DeKaser.