I think realistically, even at the peak, that house was worth ~ 350-400.
I think a lot of people over payed for small houses on small lots because they had some desired feature like granite and they did not look too closely at the size of the lot.
I purchased in 2006 and for a year afterwards I was seeing comparable nearby houses on 3000 sq ft lots selling for more than we paid for our house on a 6500 sq ft lot. Then august came, and if a seller needs to get out from under their little bungalow they have to list it under 400.