...But Ben (Bernanke) doesn't lend money into the housing market. Not a dime. And with the banking system essentially bankrupt, will there really be an appetite to take risk on mortgage securities in a market that has a couple years of depreciation behind it? The idea that "large investors" are going to be able to get loans is ludicrous as well. At least joe-sixpack with a 20% downpayment has some skin in the game, and has a job that can provide some income to support the mortgage. "large investors" are dependant entirely on the rental market (which, with a surplus of houses in the marketplace, will perform very poorly), which means that risk premia will necessarily be even higher for them. Practically speaking, this means that property probably will have to have net cashflow, on an unlevered basis, of somewhere close to 10%, before anything resembling a 'bottom' will have been hit. Right now, net cashflows are somewhere between 2 and 4%, so there's a long ways to go down. Maybe 20 years from now. Interest rates are going nowhere but up in the sector. Too much leverage on overvalued assets always has disasterous consequences.
Tell them the "way out" is that markets will clear at lower prices (as long as the government doesn't cook up some harebrained scheme to prevent this), new purchases will be made at sensible valuations, new loans will be made according to sound banking principles, the overextended and incompetent players will go bust, leaving the better-run institutions and new entrants, who will then do business the way it was done before the bubble. Things will go back to normal, but with people more conservative and risk-aware than before. If they don't believe you (or your wife), get them to read about the recoveries from every other recession that has ever happened. Then tell them to get some economics education - as business executives it is irresponsible for them to be so ignorant about the way the economy works. If they had bothered to do that in the first place, they would be cleaning up vs the competition now, instead of freezing like frightened rabbits in the headlights.
Stock owners don't get to put 20% down and then have no margin calls for 30 years as long as they meet the interest payments. Instead they get margin calls. So no, it doesn't make sense to leverage stocks beyond a certain amount. You can be right on the end-result, and still get wiped out due to short-term overreaction such as a market crash or bear market. Assuming equal valuations, the prudent level of leverage is far higher for real estate than it is for stocks. 50% debt would have bankrupted diversified stockholders 3 or 4 times in the last 100 years, whereas most real estate owners have done fine with 80% debt and only 20% equity on their initial home purchases.