One of Mercer Island’s most stately homes, the 1.4 acre Proctor Landing Estate and its 17,000 square-foot mansion has graced the banks of Lake Washington for over 75 years. And until recently, the home was rumored to be worth somewhere around $40 million. Until it wasn’t.

As the seasonal real estate market reaches its traditional late-summer peak, downward pressure on prices is giving home shoppers on Mercer Island some real bargaining power — especially if you’re looking for an ultra-high end waterfront estate.

While home prices have been inching down elsewhere in King County, home sales prices here have seen a much faster drop. Since April, the 75 homes sold here were marked down an average 10 percent under asking price and more than 15 percent under original pricing, according to numbers from broker-supported Northwest Multiple Listing Service (NWMLS) and online real estate broker Redfin.com. The median price of a home on the Island (condo and single-family) in July was $847,500, a 19 percent drop from last year.

The big price reductions drew attention nationally as San Francisco-based online broker ZipRealty named Mercer Island as the “coldest” housing market in the Seattle metro area in a quarterly report. ZipRealty Vice President Leslie Tyler said the “hot” and “cold” markets were determined by the ratio of asking price to sales price. Mercer Island’s mean for the second quarter of 2009 was 83 percent. The reductions indicate the growing realization of sellers that the high prices they commanded in the past are just that: history.

“All the coldest areas at the bottom of the list are the ‘higher-end’ areas,” she said. “That’s true across the country. And that’s because it’s harder for the buyer. Most of them are not first time home buyers.”

Thanks to an $8,000 federal incentive for first-time home buyers (set to expire in November), NWMLS numbers show King County has seen an increase in demand for much lower-priced housing. But much of that isn’t translating into move-up buyers.

In the high-priced real-estate market of Mercer Island, John L. Scott Real Estate Managing Broker D’Ann Jackson said that’s a big reason why Mercer Island homes have been slow to move into the hands of new buyers.

“A lot of [sellers] couldn’t get their home sold and have opted to lease out their home instead,” she said.

On the other hand, Jackson said diversity in local inventory in the lower-tiers had increased — such as smaller rambler-style and condominium homes, giving first time buyers the best chance in years to move to Mercer Island.

“Condo and small residential home [prices] adjusted much quicker than the higher priced ones,” she said. “We’re not seeing the frenzy like a few years ago, but that just tells me we’re seeing some buyers and they’re looking.”

Local real estate agent Lori Midttun said the run up in prices on the Island caused the market to get “overheated” and led sellers to overprice their assets. While Mercer Island’s beauty, location and reputable school system are strong selling points, close-in neighborhoods with similar amenities are offering lower prices.

“Bargain-hunters are coming in and looking for sellers that are motivated to sell.”

The local price reductions can be seen most spectacularly at some of the Island’s grand dames along the waterfront. John L. Scott Real Estate agent Breffni McGeough, who handles real estate acquisitions for a high-end and largely foreign clientele, said many of his business dealings across the Puget Sound have been lease purchases right now because they’re afraid the bottom isn’t here yet. Locally, he’s been following the saga of several Island estates listed above $20-$30 million that have sat on the market for years at stratospheric prices.

A case in point is Proctor Landing Estate, located at the end of 60th Avenue SE and SE 32nd Street.

Up for sale years ago, the property was first offered for $34.5 million, only to sell on June 25 for $15.675 million.

Still, the $20 million haircut taken by the seller, Proctor Landing LLC, doesn’t seem as bad when the seller’s purchase price of just under $8 million is taken into account — a 100-percent return in just over a decade, according to county property tax records.

Now that the market has cooled, prices have started dropping. One mansion on the North end — a five-bedroom, nine-bathroom, 23,000 square-foot estate sitting on two acres of prime waterfront — was originally listed at $40 million in 2004. Today, the property is listed at $25 million and McGeough says he doubts any offers will soon materialize.

“She is the queen of reductions,” he said. “She has a ways to go even after the reductions … who knows where it will stop?”