Merrill Report: Housing to “free fall” in 2008

Now that’s the way to make headlines.

Just announce that housing is headed for one of the biggest dives in the last 70 years and wait for to it to hit the wires.

That’s what Merrill Lynch did yesterday.

The article I saw on CNNMoney specifically mentioned “free fall” in the headline. It said:

The worst housing financial crisis in decades is only going to get worse, a Merrill Lynch report said Wednesday.

The investment bank forecasted a 15 percent drop in housing prices in 2008 and a further 10 percent drop in 2009, with even more depreciation likely in 2010.

That is far greater than most other housing analysts have predicted. That is a Great Depression style drop. But the rent versus own historical correlation is currently far out of whack.

But for those who think that the worst is over, Merrill Lynch said that housing prices still remain comparatively high. The brokerage believes that home prices are still far above historical norms when compared to other measures such as rent or GDP. “By our calculations, it will take about a 20 to 30 percent decline in home prices to correct this imbalance,” said the report.

Merrill Lynch believes that housing starts will most likely slide another 30 percent by the end of 2008 - a historic low.

And inventory is too big and still growing.

“The current supply/demand environment does not favor a swift recovery in the housing market, in our view,” according to the report.

This report reminds me of the reports that Goldman Sachs was issuing regarding crude prices in the last few years. Remember the $100 and higher crude prediction? People laughed at them then.

Crude hit $100 on January 3.