Yahoo! Finance has posted an excellent article (from Businessweek) discussing the reasons why home prices could drop 25% or more before the housing market finally hits bottom.

Some experts have begun to suggest that a bottom is in sight. Pali Research analyst Stephen East wrote in a research note to his firm’s clients on Jan. 25 that “the sun is not shining very brightly, but at least the worst of the storm has likely passed.”

Uh.. yeah! I’ll have what he’s drinking.

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 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,” says Chris Flanagan, head of research in JPMorgan Chase’s (JPM) asset-backed securities group. “People say: I’m not buying until prices are lower.’” He predicts prices will fall about 25%, bottoming in 2010.

If you’ve been reading this or any other real estate blog, then this isn’t news to you. It’s just a sign that the mainstream market is starting to recognize that the party has ended. Millions of people are just starting to wake up from a wild night with a massive hangover.

Cheaper mortgages won’t necessarily ride to the rescue, either. Thirty-year conventional fixed-rate mortgages failed to fall after the Fed’s two January rate cuts, averaging 5.5% on Jan. 30. Financing remains cut off for subprime borrowers (BusinessWeek, 12/11/07) 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.

Banks are trying to cover themselves and are pricing new risk accordingly. The Fed rate cut seems more like a move to help banks and businesses. Consumers (homedebtors) aren’t seeing much relief.

Observers with a Calvinist streak see a housing crash as not only necessary but also positive. It will force Americans to live within their means, which will enable the U.S. to work off some of its towering debt, says Peter D. Schiff, president of Darien (Conn.) brokerage Euro Pacific Capital, who was early in predicting the crash.

There is some truth that Americans need to live within their means to avoid problems like this, however what will it take to cause that change? As we live now we’re too used to a life of excess, using credit to buy everything and even pay utility or grocery bills. How bad of a recession do we need to get into before people wake up and realize that the lifestyle we’ve fallen in love with cannot be sustained?

The bigger the boom, the harder the fall.

Read the full article as it summarizes just about every reason for the housing market to fall. When will a recovery be in sight?

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CNN reports that Manhattan home prices are still holding strong as overseas buyers and Wall Street workers compete for the few homes for sale.

Manhattan real estate continues to buck national trends - New York home prices soared during the last three months of the year, according to several surveys released Thursday.

Several factors buoyed the Manhattan market:

Bonus Money
Wall Street brokerages, despite a hit from cratering mortgage bonds, still paid out big, end-of-year bonuses.

Overseas Buyers
Another major factor is the influence of foreign buyers, according to Greg Heym, chief economist for Brown Harris Stevens. The dollar’s decline made buying in Manhattan something of a bargain for them.

Low Interest Rates
On the lower end, reasonable interest rates kept monthly mortgage payments within reach for many New Yorkers.

“It’s like the Energizer bunny,” said Pam Liebman, CEO of Corcoran. “It just keeps going and going and going.”

This will just keep going on forever, because New York has never seen declines in real estate, right? It’s been said before that the NYC housing market is very closely related to the stock market. With the Fed keeping interest rates low (and possibly lowering them) the stock market should hold up well.

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CNN is featuring a great article that highlights how it’s difficult to believe what so-called experts predict will happen in the housing market.

Before you put much hope in forecasts for a 2008 rebound in the battered housing market, consider this: A year ago at this time many top economists were looking for that recovery to begin in 2007.

Instead, the year saw historic declines in nearly every measure of housing strength and home building, and left a trail of predictions from some of the nation’s top economists that look - at best - foolish.

Anyone can be an expert at anything. It’s about time a mainstream media outlet is reminding us of these incorrect predictions.

“A lot can go wrong here,” said David Wyss, chief economist at Standard & Poor’s.

“I thought we’d have problems, but I thought it’d be a smoother adjustment,” Wyss said about the problems that developed in mortgage-backed securities. “The financial side was much worse than I thought it was going to be.”

A year ago Wyss was forecasting a 7 percent drop in home prices from peak levels. Instead prices fell nearly 10 percent from the July 2006 record.

“Everyone thought I was nuts. Now it turns out I was an optimist,” he said.

There are two lessons to be learned:

1. It’s difficult to predict exactly what will happen with the housing market (or any market for that matter)
2. Don’t believe predictions from so-called experts

The build-up or inflation of the housing bubble was based heavily on speculation without much regard to market fundamentals. The future of the housing market will likely be determined by the same speculation, for better or for worse.

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The New York Times is reporting that in several cities officials can’t keep up on mortgage fraud investigation cases.

The number of mortgage fraud cases has grown so fast that government agencies that investigate and prosecute them cannot keep up, lenders and law enforcement officials have said.

…

“I don’t think any law enforcement agency can keep up with mortgage fraud, because it’s such a growth industry,” said Chuck Cross, vice president of mortgage regulatory policy for the conference of state bank supervisors, an organization of regulators and bankers. “There’s too many cases, not enough agents.”

Mortgage fraud covers crimes like false statements on mortgage applications and elaborate “flipping” schemes that involve multiple properties and corrupt appraisers, title companies and straw buyers.

In one common flipping plot, someone buys a house, has it appraised for more than its true value and sells it to a straw buyer for the inflated price, pocketing the difference. The straw buyer lets the house fall into foreclosure, leaving the bank with the loss.

Why wouldn’t banks go after any money from the straw buyer? If the laws are written so you can simply walk away from a house without having to pay anything back, then we’re likely to see more and more fraud schemes revealed.

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