It varies from state to state, and even area to area. In North Florida, ALL closing costs are associated with getting financing, in other words, no cost at all. If it is a foreclosure home, there can be a slight cost.... more
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.