I don't understand something...(politics and the free-market)

This is somewhat of a fallacy.  Look, the value of your home, and the homes around it are based on the assessed value.  If one person goes into foreclosure and someone buys it for cheap, as long as they do what needs to be done to put it on par with the other homes in the neighborhood, they are all going to retain assessed values.  Now, if the market will not bear the price, then home values will drop, but that will not be affected by one home being foreclosed upon and selling for cheap, just as it wouldn't for someone that is stupid and sells their home for less than it is worth.  Home values are based on trends and not on one-time transactions.  I think that what McCain was saying (though I didn't hear him say it, so I am just guessing by what you have said) is that if your neighborhood is trending into foreclosures (I am not sure why it would do that), then you could save the value of your home from depletion by buying and flipping the homes (based on the assumption that most homes that go into foreclosure have also fallen into some disrepair) and reselling to buyers that can afford the value of the home.   Cause there's a bunch of those folks sitting around.

If you have the means to buy up several foreclosed homes, however, will you be nice to me and buy me a new carbon tri bike.  Thanks, buddy.

I would argue that the assessed value is based on some sort of average of prior sales in the neighborhood.

To think about how foreclosures affect value, in a subdivision with two similar homes for sale, one from a bank due to foreclosure and one from a private owner, the bank will probably sell the house for less - typically for the outstanding balance of the mortgage.  A private purchaser looking to buy a home in that subdivision might see some differences between the properties, but would likely choose the cheaper one.  In order to induce a sale, the private owner might have to drop his price, and the more foreclosed, cheaper homes available, the more likely he would have to drop his price.  If there were 3 or 4 foreclosures for sale in the same subdivision, then it is more likely the private seller would have to drop his price.

There's a wrinkle because foreclosed homes are usually sold at auctions to companies that "flip" them - but those companies want to turn their inventory over and can still take a cut in price and make a profit

jdwright is right about trends - one or two sales won't matter, but there are areas with a lot of defaults.  Supposedly, a gov't backed plan would allow the defaulting mortgagors to refinance at terms they can pay - let's see how that works out.

If the person looking at using the $425,000 sale as a comparable is doing their job properly they would recognize that sale for what it is and either throw it out due to the conditions of the sale or make adjustments to it to bring it back in line with the other $500,000 sales in the neighborhood.  Please note this is all contingent on the big/bold "if".  So, in theory that sale shouldn't hurt the values, at least on paper.  Market perceptions by potential buyers and general stigma from the foreclosure could still have an impact though.