As a potential homebuyer I was always confused as to what is a fair price to pay for a house. After many readings and years of research I learned that historically the average homebuyer typically pays 3 times their income for a house.
In some of the bubble areas on the coasts homebuyers have paid 10 times income for a place to call their own. The only way this happened was through poor lending standards. Banks and mortgage brokers started to approve loans without documented income and offered "subprime loans" that offered very low payments for two years at a low interest rate but then escalated to higher interest rates that became unaffordable for the average buyer.
This type of lending is now gone. Banks have had high foreclosure rates which has resulted in tighter lending standards because a lot of their assets are tied up in loans that are going to never be paid back.
My advice to all of you is to wait until the lending standards have had a drastic effect on home prices. Many sellers have not realized the credit crunch and its effect on peoples ability to lend. When you are looking for a house make sure your offers are close to 3X income and don't hesitate to lowball sellers!!! Many are starting to get desperate and you might get lucky and they will accept your offer.
I expect these offers to be taken at a much higher rate as we get into the colder months of 2008. when the spring/summer housing sales are a bust sellers will start to panic.
In a nuthsell, be patient, underbid, and don't be in a rush. According to the most recent housing stats 30% of homes are underwater versus what people payed for them.