On another short sale we are working on, a particular husband & wife real estate team are particularly troublesome. We had the full confidence of our homeowner however the agents saw their commission going away, so they actually contacted the lender (WAMU) and told them that they knew if our Short Sale Offer would be declined, they were confident that they could field higher and better offers and help the lender minimize their losses. INDEED! They were looking out for their own butts only.

Needless to say, our offer was declined early last month. Ironically, these bumbling agents have yet to take any new offers over these past 6 weeks and haven’t even had a showing. The real losers here are the homeowners who are “taking it in the shorts” simply because we beat the agents to the gun with our short sale and they saw the next payment on their Escalade going away.

We are turning this one over to our corporate legal counsel and we’ll update you next week. We want these morons to go down. Goodness, did I say that out loud? OK, now on to our topic for the month: The Housing Meltdown.

So, you think the housing bust is bad? Prepare for worse to come. Reports show that national home prices could plummet an additional 25% over the next two or three years. I know I sound like Chicken Little, but I have the facts to back it up. This is my version of why I think prices could fall so much and what the fallout might be:

As our brilliant politicians in Washington DC struggle to keep the U.S. out of recession, the swirling confusion over the housing market is making their job a lot tougher. Most demonstrate a minimal understanding of economics, so when tough questions are posed to them, most retreat to rhetoric ad sound bites and the espousal of blame on the other guy. But these are the questions that must be answered if any meaningful help or reform is to come out of our geniuses in Washington:

Will American consumers keep shopping or be forced to pull back? Will banks lend freely or be hamstrung by mortgage defaults? What are the best policy options right now? Those and other important questions simply can't be answered without a good idea of whether home prices will rise, flatten out, or keep dropping.

Some experts have begun to suggest that a bottom is in sight. I have heard one go so far as to suggest that "the sun is not shining very brightly, but at least the worst of the storm has likely passed." However, in my opinion it's considerably more likely that the storm is still gathering force.

On Jan. 30 the government said annual economic growth slowed to just 0.6% in the fourth quarter of 2007 as home construction plunged at a 24% annual rate. The Standard & Poor's/Case-Shiller 20-city home price index fell 7.7% in November from the year before, the biggest decline since the index was created in 2000. We are waiting on first quarter 2008 statistics, but we all know what they are going to indicate.

And that could be just the start. Brace yourself: Home prices could sink an additional 25% over the next two or three years, returning values to their 2000 levels in inflation-adjusted terms. That's even with the Federal Reserve's latest rate cut. While a 25% decline is unprecedented in modern times, some economists are beginning to talk about it. There is now a real potential for another 25% to 30% downside over the next two years.

Shocking though it might seem, a decline of 25% from here would merely reverse the market's spectacular appreciation during the boom. It would put the national price level right back on its long-term growth trend line, a surprisingly modest 0.4% a year after inflation. There's a recent model for this kind of return to normalcy after the bursting of a financial bubble. The stock market decline that began in 2000 erased most of the gains of the boom of the second half of the 1990s, leaving investors with ordinary-sized returns.

Why might housing prices plunge violently from here? Remember the two powerful forces that pushed them up: lax lending standards and the conviction that housing is a fail-safe investment. Now both are working in reverse, depressing demand for housing faster than homebuilders can rein in supply. By reinstituting basic safeguards such as down payments and proof of income, lenders have disqualified thousands of potential buyers. And many people who do qualify have lost the desire to buy. A down market is getting baked into expectations. People we talk to say they are not buying until prices are lower. I predict prices will fall about 25%, bottoming in 2010 and returning to the values we knew were real back in 2000 through 2003, depending on where you live in the county.

Nobody can be sure how far prices will decline. Still, if prices drop that much, it could mean big trouble for our economy, which is already on the brink of recession. It would blow a hole in the balance sheets of banks and households, slicing more than $5 trillion off household wealth. That's roughly the size of the drop in stock market wealth from the peak in early 2000, a big reason for the recession of 2001. While not exactly similar, a housing decline that started in 1925 and ran until 1932 weakened banks and contributed to the Great Depression, which started in the U.S. in 1929.

It has become a cliché, but an accurate one, that Americans used their homes as ATMs during the boom years. They lined up for cash-out refi’s or home-equity loans to turn housing wealth into spending money. So far, the amount of equity being withdrawn has remained surprisingly strong—$700 billion at an annual rate in the third quarter. But it's bound to dwindle if prices keep falling, giving the economy a further downward push. According to a recent national analysis conducted by Zillow.com, a further 20% decline in prices nationwide would mean that two-thirds of people who bought in the past year would owe more than their homes would be worth, meaning they couldn't take out cash if they wanted to.

Many people are living that problem now. Their houses have quickly gone from a money geyser to a money drain. Many raised cash in 2005 by refinancing less than a year after they bought their home. They put the money toward household bills and improvements, toys, vacations and other things. Now the cash is gone and interest rates have ratcheted up to 11% or better. Some still says they can make their new payments but it doesn't leave room for anything else. No wonder that retail sales fell 0.4% in May, and economists are projecting a sharp slowdown in overall consumer spending this entire year.

The second shock to the economy from the housing bust will come from the financial sector, which has been weakened by losses on mortgages as well as mortgage-backed securities and more exotic derivatives. Banks borrow so much money to fund their investments that if a loss on some holding reduces their capital by $10, they have to reduce their lending by $100 to avoid exceeding their self-chosen leverage targets. Banks and other financial institutions will suffer about $200 billion in real estate losses and respond by cutting their lending by $2 trillion, or about 5% of total lending.

The cutback could be even more extreme if they react to the turmoil by lowering their leverage ratios rather than keeping them intact. Banks have already begun tightening lending standards. In the third quarter, mortgages were harder to get than at any time in the 17-year history of the Federal Reserve's survey of senior loan officers.

Prices won't fall uniformly, of course. The price decline will be smaller if it's stretched out over longer than, say, two years, because inflation will have more time to do some of the job of eroding the real value of homes. Still, if the national average decline is anywhere near 25%, the entire U.S. economy is in for trouble. Keep in mind that the relatively puny price decline to date has already pushed home-loan delinquencies to their highest level in 20 years. The plunge in residential construction reduced the economy's annual growth rate by a full percentage point in the first quarter of 2008. A bigger decrease would wipe out even more jobs—carpenters, real estate agents, mortgage brokers, furniture salespeople.

For American consumers, meanwhile, huge losses would almost certainly undermine the long-held premise that homeownership is the most reliable way to build wealth and a middle-class life. One look at the long-term home price chart tells you all you need to know: Starting in 2000, prices crossed above their trend line and just kept going up. The spike had never happened in modern U.S. history, according to data dating back to 1890.

In the beginning of this year, those who know me know I predicted a “sharp drop” in housing prices. Statistics are proving my prediction to be accurate. And make no mistake about it; we have NOT seen the worst. This is a historic turning point.

Optimists point out that the Fed, Congress, and the White House are all committed to keeping housing aloft so it doesn't kill the economy. The Fed continues to reduce the federal funds rate in extremely rapid moves. Homebuilders also are doing their bit to support prices: They've cut production so drastically that even though home sales fell more than expected in the first quarter of this year, the backlog of unsold new homes shrank slightly.

Pessimists aren't impressed. Many are looking for a 20% decline in prices from their peak. Some actually say 40% wouldn't shock them. It really is difficult to predict with any accuracy because we've never been here before, so there's no road map. But gain I say, make no mistake about it, we are in a meltdown.

There's even uncertainty about where prices are right now, since many would-be sellers are refusing to cut them enough to make a sale. A recent survey found that 36% of homeowners thought their homes had increased in value over the past year, vs. 23% who thought they had decreased. That willful optimism translates directly into the record overhang of unsold existing homes: more than 4 million.

For a truer picture of the market, look at sales by banks and builders, which don't have the luxury to wait things out because they have to worry about cash flow. Deutsche Bank, among other banks, has been slashing prices on repossessed homes to get rid of them. In a recent transaction chronicled on a well respected real estate blog, Deutsche Bank sold a house in Woodbridge, Va., in December for $150,000, less than half its last sale price of $315,000 in the spring of 2005. In November, Lennar , the big builder, sold 11,000 home sites to a joint venture it formed with Morgan Stanley Real Estate for $525 million, 60% below what they were valued on Lennar's books. That's capitulation, and it's likely to occur more often as sellers get the idea that waiting won't solve their problems.

Plenty of other evidence supports the notion that home prices have further to fall. There's a crisis of confidence in the securitization of mortgages, which pumped up housing demand by giving buyers access to nationwide and even global pools of capital. The loose links in the securitization chain allowed risky loans to be made at low rates. Trust in that system is broken and will not be mended quickly.

Almost the only mortgages being securitized successfully are the ones bought by Fannie Mae and Freddie Mac, the private companies with implicit government backing. They accounted for about 87% of mortgage securitizations in December, vs. fewer than half in 2005 and 2006. Sub-prime lending is nearly shut down, home-equity loans and lines of credit are scarce, and jumbo mortgages (too big for Fannie and Freddie currently to purchase) command premium rates. A survey of real estate agents found that a third of planned home sales were canceled or delayed last fall because of loan problems.

Even Fannie and Freddie, which style themselves as the last resort of the home buyer, have tightened standards and raised fees. And they remain reluctant to raise funds to buy mortgages if it means lowering returns to shareholders.

Cheaper mortgages won't necessarily ride to the rescue, either. Thirty-year conventional fixed-rate mortgages failed to fall after the Fed's rate cuts, averaging 5.5% on March 30. Financing remains cut off for sub-prime borrowers and for owners whose home equity has dipped too low to qualify for a new loan. Fed rate cuts will ease, but not eliminate, the pain from resets on adjustable-rate loans.

While I do not consider my self a pessimist (rather a realist) I see a housing crash as not only necessary but also positive. It will force Americans to live within their means, (a novel concept) which will enable the U.S. to work off some of its towering debt. In 2005 the share of gross domestic product devoted to residential construction reached the highest since 1950, when the U.S. was racing to house the baby boom generation and make up for the lack of construction during the Depression and World War II. Now, if there's any construction, it's going to be factories, oil exploration, and mines. Americans are going to have their credit cards taken away from them by the lenders. We're going to turn the American economy into a cash economy.

As a Foreclosure counselor, I foresee many changes ahead. In looking back it is probably pretty accurate to place more of the blame for the fiasco on builders and lenders and less on borrowers. We have been fed the illusion that acquiring a home was a magic key to stability, to wealth-building, Even though this is what I do for a living (buying and selling real estate) I never believed the theory that homeownership was a sure path to wealth. It is a myth foisted on lower-income Americans by politicians serving the builders and bankers.

The sense of betrayal is probably most intense among the working-class families who were supposed to be the greatest beneficiaries of easy access to low-down-payment mortgages. The less-pricey outskirts of expensive cities are precisely the areas where the biggest share of recent buyers are underwater on their mortgages.

If home prices really fall an additional 25%, Washington's rescue program is likely to seem seriously inadequate. So far the Bush Administration is pushing two main ideas: FHASecure, which offers new mortgages to certain well-qualified borrowers, and Hope Now, a private-sector program to streamline the modification of unaffordable loans. But FHASecure isn't open to people who are underwater on their mortgages—in other words, those who most need help. And the Hope Now alliance doesn't seem to be coping successfully with the mounting backlog of loan delinquencies. The other big Washington initiative, to crack down on loose lending practices, could be ineffective and even counterproductive, because it's making loan funding less available right when it's needed most.

The next big reform ideas may hark back to President Franklin D. Roosevelt. Many of the housing market's props today—including Fannie Mae and the Federal Housing Administration—were launched during the 1930s. If things get bad enough it could raise interest in renewing another innovation of the Depression years, the Home Owners' Loan Corp., which loaned money directly to hard-pressed borrowers to prevent foreclosure. If enough banks get into trouble, Congress might even create something roughly parallel to the 1980s-era Resolution Trust Corp., which cleared up the savings and loan crisis by shutting down weak thrifts, thus wiping out the investments of the owners, and then selling off their assets to the highest bidders.

And with homeownership no longer seeming like such a sure thing, national housing policy could become more evenhanded toward renters. Congress is weighing the creation of a National Affordable Housing Trust Fund that would build, rehabilitate, and preserve 1.5 million units of housing for the lowest-income families over the next 10 years. The national homeownership rate has already fallen about one percentage point from its peak, to 68.2% in last year's third quarter.

However things unfold, the changes are likely to be wrenching. THE BIGGER THE BOOM, THE HARDER THE FALL. Make no mistake about it, we are in a meltdown. We are however, on the cusp of the biggest profit-taking period for seasoned investors that I have ever seen. Real estate foreclosures will prove profitable for the investor for at least the next 12 to 18 months. Then it will be back to buying real estate for realistic prices where you can buy portfolio properties and rent them out for positive cash flows…just like the good old days.

Now if we can just keep the real estate agents out of it, we will do just fine.

May your investments be profitable! God Bless!