I keep think about the following scenario, and find it rather frightful. Yet, unless I am truly mistaken in some sense, it could well become an all too real scenario -- and one that does not get much discussion.

Certainly it is obvious to all that housing is in decline, and for the informed, that housing will most likely stay in decline thru at least 2009 (and personally I believe until 2012).

Given the above, we now have to think about the consumer who lives on the "monthly payment" plan. This future homebuyer, who now faces the necessity of greater down payments and better credit scores will also be facing the prospect of rising rates just at the time that the housing market may be bottoming. Mortgage Rates Near a Year High (Wall Street Journal) This may further exacerbate the decline in housing over time as the prices will most obviously have to fall to meet the budget of the monthly payment plan.

At the same time, given the strong probability we are in or will be at peak oil in the next few years, rising energy prices will also be impacting that monthly budget, further reducing the monthly payment available for housing. And on the high end, should we get an Obama presidency, the people 'at the top' will not only be experiencing some fall in their home values, but rising taxes both locally and nationally.

And finally, as the boomers troll over to 65 in just a few short years, the well heeled will be smart and sell out, moving to better climes like Costa Rica. The less than well heeled will try to sell out, only to find they have less to retire on that they thought, and the not well heeled at all will be devastated when they are forced to sell out to meet the monthly living costs of retirement or else continue to work.

The last part of the scenario means less jobs for those who would normally be joining the workforce as they compete against starving boomers who will work with no healthcare because they will be on the Uncle Sam plan (Medicare). this will squeeze out further buyers in the future.

I dunno, I don't see ANY real improvement in housing at any time going forward, certainly not vis-vis the backdrop of inflation and rising energy costs. What am I missing in this scenario?

1. massive oversupply of housing

2. the falling "residents per household" in the U.S. could reverse

3. the tidal wave of housing-mortgage-related lawsuits which is already threatening to swamp U.S. courts

Let's start by recalling that there are 18.6 million vacant homes in the U.S.--a staggeringly large number. Here is the Census report: CENSUS BUREAU REPORTS ON RESIDENTIAL VACANCIES AND HOMEOWNERSHIP

There were an estimated 129.4 million housing units in the United States in the first quarter 2008. Approximately 110.8 million housing units were occupied: 75.1 million by owners and 35.7 million by renters.

Of the 2.1 million increase in total housing units, 1.1 million were occupied and 1.0 million were vacant units. Of the 1.0 million additional vacant units from last year, only 20.5 percent were for rent or for sale.

The number of total vacant housing units, 18.6 million, was higher than the estimated number in first quarter 2007. Of these vacant housing units, 13.9 million were for year-round use and 4.7 million were for seasonal use. Approximately 4.1 million of the year-round vacant units were for rent, 2.3 million were for sale only, and the remaining 7.5 million units were vacant for a variety of other reasons.

A million new units sit empty, and only 20% are for sale. We can presume the builders/developers/lenders are hanging on to the other 800,000 empty new homes, hoping and praying that some miraculous turn-around in the housing market will enable them to sell a million vacant homes in the near future.

Even as the "downturn" worsens, over a million new dwellings will be constructed and added to the inventory this year. So let's just round up and say there are (or soon will be) 20 million vacant residences in the U.S.

With an average household size of about 2.5 people, we have room for 50 million more citizens without building a single additional home. If we subtract the 5 million vacation homes, that leaves 15 million vacant dwellings, and I think it is safe to say that is a massive oversupply of housing.

Household size has been dropping for 100 years: Census: U.S. household size shrinking Wealth, looser social restrictions contributing to trend, experts say. But as the "wealth effect" reverses, maybe that trend will reverse, too.

How many elderly and not-so-elderly people live alone in a big house? A lot. How many couples bounce around a big house, now that the offspring have left? Take the humongous national wealth reduction we are just starting to experience and add in 60 million retiring Baby Boomers, and what do you get?

It seems to me you get a lot of reasons for household size to increase. Kids move back home, creaky retirees open up the house for a live-in assistant, and unable-to-retire folks start renting out all those empty rooms for extra income. And if household size even edges up slightly, that will greatly reduce the number of dwellings the nation needs for actually housing people as opposed to investment/gambling schemes. An increase in household size would radically increase inventory of unwanted/unsold/unrented dwellings.

Last but not least, let's ponder the consequences of lawsuits: against the builders of shoddy/defective homes, against fraudulent lenders, predatory lenders, investment banks which packaged high-risk mortgages and sold then as low-risk "investments," and on and on.

When tottering builders are pushed into liquidation by lawsuits, their inventory (those 800,000 empty new homes) will not be allowed to sit around waiting for better times; they will be auctioned off and the proceeds given to the bondholders and lienholders. What happens to a shaky market when hundreds of thousands of houses get auctioned off, no-minimum bid? It drops.

What happens when insolvent lenders who have been hoarding and hiding hundreds of thousands of foreclosed/distressed properties are finally forced into liquidation? All those distressed properties get sold off, too. More inventory, more auctions, and prices which will be dropping to near-zero in many markets.

Just for fun, here was my 2006 prediction of housing's future, made back when the bubble was still expanding in many parts of the country:

I missed a few headwinds like rising interest rates and Peak Oil, but all in all we seem to be proceeding down the stairs in an orderly wealth-destroying fashion.

Housing will finally bottom when it's no longer seen as an investment vehicle. As long as anxious bottom-fishers are bidding on auctioned properties "because they're so cheap now," the bottom will remain elusive. Only when all hopes of quick profit from buying real estate have been completely extinguished can a bottom slowly form.

Bailout alert.

A number of readers emailed me this link, which is an organization dedicated to halting the insane bailout of bankers now before Congress: Fed Up USA.

The Shah of Plano also sent in this excellent explantion of just how insane the bailout is: Time to Get Political Folks…Massive Bailouts Front and Center

Thank you, Jeffrey R. ($25), for your much-appreciated generous donation to this site. I am greatly honored by your support and readership.