To begin with, understanding how prices are affected by demand is important. Even a small drop in demand or a small increase can cause prices to fluctuate wildly.
For example, suppose in a small town there are 100 homes for sale and 99 buyers. Well, clearly, someone's home is not going to sell. So that homeowner will drop his price. As a result, perhaps one of the buyers will buy his house instead. This in turn will cause another homeowner to drop his price. Perhaps if prices drop enough, another buyer will appear to snatch up a bargain.
Conversely, if there are 99 homes for sale and 100 buyers, one buyer is not going to get a house. He might bid up the prices in an attempt to buy a home, which in turn can cause a bidding war.
If the median home price in our mythical town is $100,000, it is not hard to see how a small bidding war, between even a few buyers, can increase home prices by as much as 5-10%, as the incremental monthly cost of ownership is not that great. Similarly, it is not hard to see how even a small discrepancy between the number of sellers and buyers can drop prices dramatically - again by as much as 5-10% without effort. And all this because of a ONE PERCENT difference between buyers and sellers!
So you see, our "housing bubble" was not due to huge demand and the collapse was not due to a huge drop in demand. People still want houses, just not as much as before. If demand drops 5-10%, housing prices can drop 20-30% easily.
UPDATE: A Canadian reader sends these interesting links:
This sounds all so familiar to me. The only difference, the weather was nicer in Ft. Lauderdale!