"They" said it couldn't happen, but it has. Home prices are falling at rates not seen since the Great Depression. From peak to March 2008:

• New Home Median Prices -13%
• Existing Home Median Prices -13%
• Case Shiller US National Index -16%

So what are "They" saying now? That's right, "the bottom's in". I say, not so fast. To quote Fred Hickey, proprietor of The High-Tech Strategist and frequent participant in Barron's Round tables:

This is the biggest housing collapse in this country's history, and it's happened before widespread job losses hit the economy. I can't imagine how bad the housing market could get as the job losses mount.

In other words, what we have here is a housing depression without even a recession!

I'm no expert, but isn't this what traditional housing busts are about - rising unemployment and falling incomes result in more home supply, less home demand and eventually lower home prices. You know, a recession. So what if a recession is in the offing? May I suggest a whole heap of trouble for housing prices. In fact, 2 to 3 more years of declining home prices is a real possibility.

How about an analog to defend my view? Have a look at the table at the end of this missive, where I compare the Savings and Loan (S&L) Crisis, arguably the largest housing crisis since the Great Depression, to our current Sub-Prime Crisis.

The S&L Crisis ended on traditional housing bust dynamics: rising unemployment and falling real incomes. Home supply overwhelmed demand and rising prices eventually turned into outright declines.

Our Sub-Prime Crisis, 2 plus years old now, is looking very ugly vs. the S&L analog. Home prices are already down 15% from the top. Inventories are at historic highs and likely set to rise on mortgage resets alone. The consumer is in horrible financial shape, sitting with a huge debt load and near zero savings in the face of an exploding cost of living. More defaults and foreclosures loom. Current vs. 1989 analogs are illuminating and suggest that home prices are extremely vulnerable to a recession:

• Months Home Inventory at 11 months sales in May is 1.5x the 1989 analog. Home Vacancy Rate is a record and 1.8x the 1989 analog.

• And talk about a supply pipeline, Foreclosure Rates are already 3.4x the 1989 analog. Despite this, builders are still adding to supply, albeit at a decelerating rate.

• As was true in the S&L analog, the Unemployment Rate is now trending up, spiking to 5.5% in May. Considering the BLS's Birth/Death model is skewing employment to the upside, the unemployment rate is probably much worse.

• Consumers' Cost of Living, as measured by John Williams' reconstituted CPI, is growing 2.4x faster than Disposable Income vs. near flat on the 1989 analog.

• Personal Savings Rates are essentially ZERO (and have been for several years now) vs. 7% on the 1989 analog.

• Household Debt to Income at 133% in March is 1.5x larger than the 1989 analog.

The consumer is in no position to buy at current home prices and is more likely to HAVE TO sell, even without a recession. As the analog suggests, if a recession is directly ahead, expect even lower home prices, with a bottom not to be found until 2010?

Now, a recession is more than a rhetorical question. Despite assurances to the contrary, by notables like Hank Paulsen and Ben Bernanke, recession may be a forgone conclusion, as what drove our recent economic expansion, housing, is what will bring it down. Bill Fleckenstein, proprietor of Fleckenstein Capital and co-author of Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve:

We bailed out an equity bubble with a real-estate bubble. The bulk of GDP growth in the 2003-2007 "up cycle" was a function of mortgage-equity extraction, and 30%-40% of jobs were created in real-estate-related industries. Now that is gone, with the financial industry imploding at the same time. What's left are debts that people can't service (due to living beyond their means) -- further exacerbated by the inflation that's squeezing everyone's paychecks.

When thinking about all that, it's understandable how the financial system could be in the worst crisis since the Depression, as has been noted often, even in the mainstream press.) What makes no sense is to think that the worst has been discounted or that we'll experience just a drive-by recession. Tough times lie ahead, and thinking otherwise will not help anyone.

But things could get even worse. What if mortgage rates rise, as they are indeed doing now? Declining mortgage rates likely mitigated home price declines during the S&L Crises' final plunge. Recession PLUS rising mortgage rates is the last thing housing needs.

Again, this is not just a rhetorical question. A strong case can be made that the 25 year secular decline in interest rates is over and mortgage rates will be heading higher, not only on continued risk aversion by lenders, but increasingly on rising price inflation and a falling dollar. Certainly, it is a fact that the Fed and its foreign central bank partners have had about ZERO impact on bringing down mortgage rates. If anything, it's been the other way around. If mortgage rates are heading higher, much lower home prices are a given.

Be wary of the bottom caller. Falling knives can be fatal.