While listening to Chairman Ben Bernanke’s second lecture (available here) out of four hosted at George Washington University, he made the point that housing prices does not look as bad if inflation is adjusted. Out of curiosity – here is the Case-Shiller index for San Diego and San Francisco (data here), first in nominal terms:
Here is the index adjusted for inflation, which I adjust for price level using the CPI series from FRED (here):
In real terms, the value for San Francisco in March 1996 is 42.34. The value in January 2012 is 55.35. That is still a gap of about 30.7%. I envision that to be the worst-case scenario, though I would need more data on the supply and demand conditions back in 1996 and now in 2012 to get a better sense.