The pending inevitable rise in home mortgage rates due to the lack of leadership with any guts in American Politics is stalling the summer home sales for all but the “Monopoly Money” buyers – those who are riding a small tech-bubble in Silicon Valley. As the gaps widens across America between the “haves” and the “have not’s”, I see more and more distressed properties hitting an already stressed housing market. This cycle continues to drive home values into the dirt, and creates amazing pressures on the homes that are sold without being under threat of foreclosure. Simply put, those highly qualified buyers flush with cash are not willing nor interested in dealing with the insanity of short sales or REO’s, and when they find a home on the market that is a conventional sale, with no bank interference, they are ready and willing to pay a PREMIUM for the opportunity to purchase the home under relatively hassle-free circumstances. Can you blame them?

As the news media wails the threat of pending financial and social collapse under the weight of our governments failed economic policies, the average US family simply cannot take the chance of buying a home when all around them there is real and obvious threat that the housing market will continue to correct to even lower values in the next 12 – 18 months. In a recent article by Bloomberg Businessweek Senior Writer Roben Farzad highlighting what he referred to as the Housing Horror Show, he wrote the following:

“You might be tempted to believe that after four years of brutal declines in home prices, the worst of the crisis is over. The Standard & Poor’s/Case-Shiller 20-city index of prices has fallen back to where it was in 2003. Housing prices in Phoenix are at 2000 levels, and Las Vegas is revisiting 1999. Lower prices have made homes more affordable than they’ve been in a generation, and sales have gone up in six of the past nine months. “It’s very unlikely that we will see a significant further decline” in prices, Housing and Urban Development Secretary Shaun Donovan said in a July 3 appearance on CNN (TWX). “The real question is, when will we start to see sustainable increases? Some think it will be as early as the end of this summer or this fall.”

Doug Ramsey of Minneapolis investment firm Leuthold Group is a student of asset bubbles, from tech stocks in the late ’90s to commodities in the late ’70s and railroads in the 19th century. His outlook is very different from the HUD Secretary’s. Ramsey calculates that single-family housing starts would have to soar an unprecedented 60 percent to 70 percent from their current half-century low of a 419,000 annual rate just to hit the average low of the past six housing busts since 1960 (650,000 to 700,000).

Ramsey says every housing statistic he tracks, including new and existing home prices and the performance of homebuilding stocks, has so far matched the pattern of prices after the bursting of other bubbles, including the Dow Jones industrial average following the crash of 1929 and Japan’s Nikkei after its 1989 peak. It starts with a steep decline lasting three or four years, followed by a brief rally that ends in years of stagnation. The Dow took 35 years to return to pre-crash levels. The Nikkei trades at less than a third of where it peaked 22 years ago. “The housing decline,” he says, “will be a long, multiyear process, and the multiplier effect across the economy will be enormous.”

Others are equally gloomy. “It’s still a vicious cycle of foreclosures, prices falling, and buyers remaining on the sidelines,” says Jonathan Smoke, head of research for Hanley Wood, a housing data company. With the homeownership rate possibly headed to its pre-bubble level of 64 percent from 69 percent at the peak, Smoke calculates that the nation needs 1.6 million fewer homes that it now has. “We’ve gone through a period when we should have been tearing down houses,” he says. “The supply of total housing stock is beyond what is necessary.”

Scott Simon, a portfolio manager who heads real estate analysis for bond giant Pimco, says because this housing bust is so much worse than previous ones, it’s hard to tell when it will end. “There are all these things going on that we have never seen before,” he says. “No one knows how or what to model.”

Simon has been traveling the country with a 28-page PowerPoint presentation for clients that illustrates the dire state of today’s housing market. Three of 10 homes, he notes, are now sold for a loss. American homeowners have equity (market value minus mortgage debt) equal to 38 percent of their homes’ worth, down a third since 2005 and half what it was in 1950. A lot of the decline is attributable to people who have negative equity—they owe more on their mortgages than their homes are worth.

Simon also points to the affordability index, which measures the ability of a family with the median national income to buy a median-price home at current mortgage rates. The index is near an all-time high and double its level in 2006 at the peak of the bubble—meaning buyers should find many more homes within their budgets. “I would never have believed this index could get so high,” he says. A rise in affordability should have spurred purchases, boosting prices and keeping a lid on the index. “What this instead means to me is that the credit is not available to most people,” he says. “Houses aren’t cheap if you can’t get the loan.” Simon worries that the problem will get worse in October, when Fannie Mae (FNMA), Freddie Mac (FMCC), and the Federal Housing Administration drop the maximum mortgage they will buy to $625,000 from $729,750 as a temporary increase expires.

The crux of Simon’s analysis is that the loose lending practices seen during the housing bubble allowed 5 million renters to become homeowners, and that the market is in the protracted process of evicting this group. He believes housing prices will decline 6 percent to 8 percent nationally, with 6 million to 7 million more foreclosures yet to come.

If these predictions are right, the economy will be missing a key driving force for years—and the nation will keep paying the price for what Ramsey calls the “illusory prosperity” of the housing boom. “Think about local tax revenues—what the housing bubble contributed to coffers across the country,” he says. “The ripple effect for the economy was enormous: washers, dryers, carpeting, construction jobs.” The housing wealth that has now evaporated gave Americans false expectations about economic growth and rising standards of living. Asks Ramsey: “What was real and what was never meant to be?”

Clearly there are still plenty of homes for sale, and buyers who can and will purchase them. But in my experience, we are seeing a fundamental and permanent change in the dynamics of the US Housing Market, and the effect will have further staggering consequences moving forward that will impact our society for the next 30-40 years! Interest rates are going to go up… there is no way around it. And then, all bets are off…