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If you think this was a bad year for real estate, consider what the future may hold. As we're about to hear, some experts think the market has a lot more room to fall. Of course, that's only a prediction, and at the start of 2007, few people predicted just how low the housing market would fall this year. Few analysts expected scores of mortgage companies to go bankrupt or to lay off thousands of workers; few people expected to see neighborhoods emptied by foreclosure or to see the world's credit market shaken.

NPR's Chris Arnold has more on the housing problems that economists think may trigger a recession.

CHRIS ARNOLD: The housing market is a big, nasty mess. It's not a uniform mess, some neighborhoods are doing okay, but on average, home prices over the past year have been falling more broadly than they had since before World War II. Not too long ago, foreclosures were considered a rare, unhappy event. Now, entire cities are plagued by foreclosures, which are at their highest level since the Great Depression. At the same time, new home construction has fallen to the level it was at in 1991, and all that's rippling through the economy.

(Soundbite of Sawzall)

ARNOLD: Some carpenters are using a Sawzall to cut into the windowsill of the house in New Bedford. It's a working-class town and fishing port south of Boston.

Mr. STEVEN ALVES (President, Steven's Home Improvement): You can see over the years, water has gone in behind the walls. See it?

ARNOLD: Oh, yeah.

Mr. ALVES: So the sheeting here is all rotted.

ARNOLD: Steven Alves is the founder of Steven's Home Improvement. During the housing boom, a lot of people were pulling money out of their homes as if they were ATM machines to do renovations, build additions, and business was booming. This year, with house prices falling…

Mr. ALVES: People are not spending as much money as they have in the past. If you're looking at our core products, you know - roofing, siding - products like that are down about 30 percent.

ARNOLD: Alves says he's been trying to make up the difference by taking on more small jobs. But he still had to trim his workforce from 30 people down to about 20. Homebuilders, realtors, banks, plumbing companies, door manufacturers, and scores of others have laid off hundreds of thousands of people. It would be nice to think that the worst was behind us but…

Mr. WILLIAM WHEATON (Economist, Center for Real Estate, Massachusetts Institute of Technology): The bottom has nowhere near been reached.

ARNOLD: William Wheaton is an economist with MIT's Center for Real Estate. He says there was a ton of overbuilding driven in part by speculators. So he says now there are more than a million extra homes sitting on the market; that's even after we've cut home building by 50 percent and had massive layoffs. Wheaton says for the market to recover, we need to cut back building even more.

Mr. WHEATON: Oh, we haven't seen construction levels like that at any time in the last 30 years, so I am not optimistic. They were anywhere near the bottom.

ARNOLD: And then there's the whole foreclosure crisis. Over the past year, one Wall Street firm after another announced eye-popping billion-dollar losses on subprime mortgage investments. In August, the global credit market seized up as investors around the world realized that there were tons of securities out there and no one was sure what they were really worth.

Paul Willen is an economist with the Federal Reserve Bank of Boston.

Mr. PAUL WILLEN (Senior Economist and Policy Advisor, Federal Reserve Bank of Boston): This summer was shocking. I mean, those days in August when there was some bizarre stuff happening in interest rates. I mean, you'd look at the screen and you'd think that must be a mistake.

ARNOLD: Willen did a study on people in Massachusetts who bought homes with subprime loans and found that nearly 20 percent ended up in foreclosure. Subprime loans were designed for people with credit problems, but in recent years, borrowers and lenders got intoxicated by ever-rising home prices. Many people got loans for the full value of their house and they couldn't really afford the high-interest payments. With rising prices, they could refinance though and pull more money out of the home. But then the music stopped, prices fell, and a lot of people didn't have a chair to sit down on.

Mr. WILLEN: The role that subprime lending has in this crisis and the reason why it's very important right now is that it created a class of people who were extremely vulnerable for whom any sort of shock - they buy the house and then something goes wrong, like it needs a new roof, it needs new furnace, and that's $10,000, and there's just no way they can do it.

ARNOLD: On top of that, millions of people are in adjustable loans that have big jumps in their monthly payments built in.

Mark Zandi of Moody's Economy.com says, when it's all added up, there will be 750,000 foreclosures in 2007. And looking forward…

Mr. MARK ZANDI (Co-Founder, Moody's Economy.com, Inc.): I think we're in store for at least a million lost properties in '08. The average household size, I'd say, is a couple of three people, at least in a single-family home, you know, you're talking 3 million people actually lose their homes.

ARNOLD: Of course, some were speculators, others bought houses with zero down anyway, but at least some are people who've been in their homes for a long time and just didn't understand the loans that they were getting into. There are various programs and legislative proposals aimed at avoiding foreclosures; managing the ongoing fall-out will be a big challenge in 2008.

Chris Arnold, NPR News, Boston.

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