Which part of the housing market will get hit the hardest?
1) I believe the lowest-priced homes will actually do okay (fall the least in value, see the smallest drop off in demand, etc.) Despite the obvious bursting of the housing bubble, your average lower income American (and most Americans, for that matter) STILL believes that housing is a decent investment. There is a core group of non-speculators who want to put down roots, and will be willing to step up and buy when properties fall into their price range (from higher price points) and/or when new, reasonably well-maintained properties list in their range.
2) Rising interest rates HELPED pop the bubble. But in many ways, the bubble just popped under its own weight. Speculators ran out of juice, prices got way out of whack with demand, and Pow -- that was it. The fact is, interest rates are still relatively low and the economy is decent, if not great. Until and unless rates rise much more, again, your non-investor, non-speculator buyer who still has a decent wage will look to buy lower-priced homes rather than rent (especially in areas where the buy/rent ratio is not way out of whack)
3) So what part of the market is really due for a pounding? In my view, the flipper-infested middle market, and the “lower high end.”
* The middle market (think new subdivisions with street after street of $300,000-$400,000 "ghost homes") is where novice, real estate "specuvestors" really seem to have gone hog-wild. They own too many homes that are either empty or that can't rent for anywhere what they need to generate positive cash flow. I think this is where foreclosures will overwhelm the market with time.
* The lower high end is where Baby Boomers and other “I want to prove how successful I am by purchasing too much house with an IO/option ARM” types flocked. Think $700,000 - $1.3 million "McMansions." These people really didn't have any business buying 6 bedroom homes with media and/or wine rooms. But Frankenstein Financing made it possible for them to do so at low payment rates ... at least, initially. As resets surge, these homes will quickly become unaffordable. You'll see inventory continue to flood the market as these stretched owners start trying to get out from under their onerous payments.
4) As for the high-end and ultra high end, that's probably where you'll see the biggest dollar and/or percentage declines between initial list prices to actual sale prices. While money is really no object to buyers in this price range, rich people didn't get rich by being stupid with their funds. I expect to see, for instance, homes listing for $10 million to go for $7 million or $8 million ... and some for even less.
Anyway, that's my point of view, for what it's worth. Enjoy the rest of your weekend.