The value of your house is based on the value of other nearby comparable houses. That's the way Realtors perform a CMA (competitive market analysis). That's the way appraisers judge the value of a house. And--most important--that's the way prospective buyers make purchasing decisions.
If your house was worth, say, $300,000, but two nearby similar properties are for sale for $275,000, then that's what your house is worth...approximately.
And, unfortunately, some of the biggest drops in some areas (for instance, in Northern Virginia there's a real nice area called Ashburn) have been for recently-constructed homes. That's, in part, because of the run-up in prices in 2003-2005. If someone bought a house in, say, 2000, maybe their house "on paper" went up, then dropped, so it's perhaps slightly above the purchase price in 2000. But if you bought at the top of the market in, say, 2005, values didn't go up much more before they started coming down. So someone who bought in 2000 may have had a "paper loss" if he/she sells. But someone who bought in 2005 could have an actual, out of pocket, loss.
Prices will recover, but it'll take time. So if you bought your house in 2005 and its value has dropped--maybe to below what you paid for it--you've now got a "paper loss." In a while--maybe 3 years, maybe 5 years--values will rise enough so that you're not facing a drop in price from when you bought.
Hope that helps.
Sorry to be the bearer of tough news, but it is the truth.....
Yes, that could happen.
Appraisers, however, are supposed to use comparable sold priperties that sold via arms length transactions.
If the properties you are referencing were sold at arms length, then they would probably be used as a comparable sold if they qualify as a comp.
As agents, we advise our clients on neighborhood property values. We will normally do a comparable market analysis for them for similar properties in similar neighborhood to assess the value whether they ar buying or selling. We also go into the details to explain the price variances - relocation, short sales, forclosure, probate sale, condition of the homes, seller bought another house already, etc.
However, when the prices drop (esepcially since you use plural 'homes'), it does have an effect on the value of your home. If there is only one of two, the effect is smaller, but if the number of artificially low prices are significant, then the neighborhood value goes down.
Houses are just like other commodity, the values are determined by supply and demand. When there are a lot of lower priced similar houses in like locations out there, the demand for your hoome will be lower and the price people are willing to pay for yours will be lower also.