This home is a perfect example of how important pre-listing due diligence by your real estate professional is for establishing a realistic market introduction price. This home was first introduced to the market at $1,499,000 (!) in March of 2007, and as you stated, the house needs much updating. It is currently listed for $1,090,000.
Many factors need to be taken into consideration when pricing a home for sale and inevitably location and condition are extremely important. Setting an unrealistic price at the get go only results in lost interest and lost market time. Buyers (and agents) know right away if a home is overpriced, and they react by their disinterest in viewing it.
In response to your question of whether it is realistic to assume that the home will settle for 20% less than ask, the answer is that it totally depends upon the motivation of the seller. If they are williing to recognize that the market has indeed fallen and they desire to unload the property, then it is possible that they would be willing to work with and negotiate a price which is justifiable by comparable sold properties. Sellers and Buyers must keep in mind in these fragile times that much depends upon the satisfactory appraisal by the lender's representative. If the home does not compare to other similar homes and hence does not appraise out, then the sale most likely will not come together unless the seller and the buyer are willing to work together to land on a proper value number.
Feel free to contact me @203-258-3836 for any of your real estate questions.