Brad:
I agree with most of what you wrote, yet come to a different conclusion.
I've read Sailer's investigations into the problem locations, so I am not ignorant to the highly localized nature of most of the housing market crash(1). Still, there is plenty of collateral damage to go around. Also, changes in lending practices in and of themselves would cause the housing market as a whole to decline a bit, given the reduced demand due to the tougher (traditional) lending standards that keep marginal borrowers out of the market.
Even the good housing markets are seeing a decline. The Dallas/N Dallas 'burb market held steady for quite a while, but even we are seeing a decline in home values. Nothing huge, like the problem neighborhoods in the problem states, but real nonetheless. My particular neighborhood still has (v e r y s l o w l y) rising values, but we are exceptional: established for decades(2), sized for starters/empty-nesters/down-sizers, municipality takes no prisoners WRT neighborhood upkeep, and hard to beat location.
We have done better and will do better than the rest of the country, but that places us in the
least bad situation. Given economic realities, everyone has to think "What if?" because the probabilities of awful economic events are greater now than most any time since the end of WWII.
What if zahc's employer fires him a year from now and his personal financial situation was such that he needed to walk away from the house and set his credit rating on fire? That extra $500/$1000 month he paid off the loan would be wasted and that $6-$12K would sure come in handy moving to N Dakota or wherever he may have to move to find work.
What if zahc's employer fires him a year from now and he might be able to hold what he has until re-employment? That $6-$12K would sure come in handy during unemployment to keep making the mortgage payments for a few more months, keep the house, and keep his good credit.
Increasing one's investment in something when that something's market is most likely to decline is not something I would do.
Paying down your mortgage will give you a guaranteed 4% rate of return.
Not if he:
1. Walks away from the house.
2. Sells the house before the end of the mortgage.
3. Pays off the mortgage with 2011 USD but the USD devalues to any significant degree over the life of his mortgage.
IMO, "guaranteed rates of return" hang out with unicorns an leprechauns. Ain't nothing guaranteed on Earth.
(1) It gets the most air time because the loudest & liberalist congrescriters come form those areas.
(2) No great swaths of new homes can be built nearby.