As a financial guy, I can only offer the following.
Interest only loans are just that, a gamble. Many "Real Estate Speculators" are using them to buy investment properties (usually at pre-construction prices) hold the property for a couple years, than flip them. Once construction is completed, they rent them out for a period of time. You can negotiate the "penalty" out of the contract in many cases. Works, as long as the market doesn't turn.
Markets don't generally drop much more than 20% and interestingly enough, many markets hit by disasters like Katrina only see a lowering of the value of properties for a few months. Then, the speculators start buying and buying and buying and the prices start to jump and jump and jump. I took advantage of this when I bough a house in the Florida Keys after Hurricane George. I bought right after the storm, market had dipped about 15%. 6 months later, the house was worth $75,000 more than I paid for it. Today, it is worth 5 times what I paid for it.
Finally, the market hasn't cooled too much around here. Older houses are sitting a little longer on the market MAINLY because people are not making them look "presentable" they are just throwing them on the market and asking too much. Good quality, good curb appeal houses are still getting what they ask.
Ocean City's average listing time for new or used properties is still under 3 days in most cases. That's a hot market and Southern Maryland is doing well too. Yes, the appraisals are high, but for us that own, we will laugh all the way to the bank when we sell. For those who don't own, BUY! (if you can)
We have an older house, (27 yrs) BUT we dropped a fair sum of cash to make it more appealling. We talked to the buyers and they said EXACTLY what Charlie did. They said a lot of the places they looked at were dumps and that the sellers "seemed to not care" what the place looked like. This is why my place sold and theirs is still on the market.