“Prices must and will fall. Everywhere. Probably 25% to 30% from their peak.”

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“The cold, hard truth is that foreclosures are serving only to hasten the painful process of shifting housing prices back to a level the market can sustain. Prices must and will fall. Everywhere. Probably 25% to 30% from their peak.”

In today’s (December 28, 2007) Los Angeles Times, Christopher Thornberg made the above statement.

Mr. Thornberg used to be a Senior Economist with the UCLA Anderson Forecast. He’s now with the Beacon Economics Group, a research and consulting firm specializing in analyses of real estate markets.

Mr. Thornberg is not a paid mouthpiece for any special interest group. In other words, he’s a pretty sharp guy. I’ve followed his research for years and it’s never popular because it’s unbiased and honest.

And he is predicting a 25-30% decline in real estate prices due to one simple fact – prices have outpaced income.

This isn’t rocket science folks. How many of you could qualify (on paper) using standard Fannie/Freddie full doc underwriting to purchase your own home today? That’s what I thought.

The worst part of his forecast is the self-fulfilling prophecy of real estate prices. Who would buy a home today that will probably be worth 10% less next year? How about 20% less two years from now?

Add this together with the weekly tightening of underwriting guidelines we are all experiencing, lenders moving towards larger down payments and fully documented loans, increased inventories, and the avalanche of REOs right around the corner and what do you get?

It’s Econ 101 all over again. Increased supply of homes (inventories) coupled with less demand from home buyers equals a decline in real estate prices. Guaranteed. You can argue all you want, but I’m not making this story up. The market is telling us what will happen.

You can see the writing on the wall and deal with it. Or you can stick your head in the sand and pray your LA/OC/Bay Area home doesn’t drop in value.

There will always be people buying and selling homes. There will always be people needing to refinance their homes. There will always be people needing home equity loans.

The question is — what are you doing to position yourself as the lender to those people in 2008?

Or are you going to sit and stare at the phone, waiting for it to ring?