David Leonhardt's column in today's New York Times is extremely important reading. In essence, he argues that, if the demand for housing is income inelastic, the average price of housing has a fairly long way to fall. Housing expenditures will, in this case, tend to rise more slowly than income; with reasonably price-elastic housing supply, then, the relative price of housing will fall.
On the other hand, if the demand for housing is income-elastic, housing expenditures will tend to rise as a percentage of income. Almost any plausible model of housing supply will likely generate rising relative prices for housing.
As is so often the case, then, we come down to empirics--what are our estimates of the income elasticity of demand for housing? What I found in a quick search of the research literature (here, here, and here) suggests that most of the estimated elasticities are less than 1...suggesting that housing prices are likely to drop further.
Matt Yglesias raises an additional issue, which is that regulatory constraints matter. Regardless of the income elasticity of demand, if housing construction is constrained (minimum lot sizes, maximum density regulations) in some places, then housing prices in those places will tend to rise in relative terms.
So it might depend on where you are, as well.