A lot of good comments in this string...both by agents and consumers alike. A couple of points I thought worth mentioning. Chicagoland as a whole did not see the "huge" increases in pricing that was experienced in other parts of the country (though I must say, they still 'felt" pretty extreme to me!). As a result, our "correction" is also more moderate.
I've been monitoring our MLS activity (MLSNI, which is the primary MLS service in the Chicagoland area), and our total sales were way down in 2007 (to around 98,000 transactions) which is about as low as any time in the prior 10 years or so. The highest was in 2005 where we had roughly 140,000+ transactions (I'm talking just about single family detached homes and attached units like condos, townhomes, duplexes, quads, etc.).
Currently there are about 95,000 homes (and townhomes, etc.) on the market. About 6 months ago we had more like 135,000 homes for sale...so inventory has dropped considerably, though at roughly 95,000 homes, we still have about a year's worth of inventory to move. More and more of them are foreclosures and pre-foreclosures, which CAN represent a great savings....though not necessarily. In addition, many, many sellers have become "believers" that the seller's market of 2 years ago is long gone, and are repeatedly dropping their prices to attract buyer activity. There are good deals to be had.
The question always becomes "why are you buying"....is it for investment potential, or is it because you want a "home". Obviously, we all want our home to be a good investment...and of course you should take precautions in your selection not to purchase in declining areas (drive up and down the streets....are the homes well cared for as a rule, or does the area look tattered and neglected). If the homes in the area are generally well cared for, that should reflect well on the home you're interested in as well.
Also pay attention to the basics....like floorplan, location, etc. Location means things like does it back to high tension wires, or a water tower, or a highway, or train tracks? Or does it back to forest preserve, pond, golf course. And if there is a pond, how high above water level is it. If there's a golf course...is the house in the "line of fire" for stray balls. You need to consider all of those things, too.
But if you find a property you like, and you like the area, and the floorplan makes sense for your lifestyle (and for resale potential), and you've done your due-diligance about recent market activity, pricing, seller concessions....and you anticipate being in the house for several years (to endure what might continue to be a steady downturn for the next couple of years), housing is still a great investment! If you are not selling your home at a given point in time, the "downturn" is only on paper...during which you are still able to benefit from the tax benefits of home ownership!
Good luck in your search