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If the Fed doesn't drop short term interest rates I firmly believe we will be in  a recession in 2008.  Anyone who knows anything about economics knows that the housing sector has a huge impact on whether we do or don't go into a recession. 

Many of the foreclosures are a result of the Fed putting interest rates far too low and then raising them back to more normal levels in a span of a few years.   The reason they dropped the rates was to keep the dollar from being devalued.  They thought we would be entering into a period of deflation.  So they lowered rates to spur the economy.  That they did.  Home values skyrocketed because of the cheap money.  Speculators went crazy building new homes.  People who shouldn't have been able to afford expensive houses now could.  And people borrowed against the equity in their homes tempted by the cheap home equity lines to buy buy buy.

Well that has all come to an end, and in my mind the Fed is largely responsible for the greatest demise in the real estate market since the Great Depression.  They were too liberal and now they are too stingy.  My prediction is that if the short-term rate doesn't come down about 1% point in the next 6 months we are going to see a mess in 2008.  If you think the housing market is bad now just wait.  All the predicitons are that 2008 will be worse than 2007.  The following quote from the Washington Post proves that point.

"New-Home Sales Sink, As Does the Forecast"
Washington Post (07/27/07) P. D3; Crutsinger, Martin

According to the Commerce Department, sales of new single-family residences fell 6.6 percent in June to a seasonally adjusted annual rate of 834,000 units, which in turn stoked new fears about how badly the U.S. economy will be damaged by a prolonged housing slump. On a region-by-region basis, new-home sales decreased 27.1 percent in the Northeast, 22.5 percent in the West and 17.1 percent in the Midwest, but climbed 7.6 percent in the South. Meanwhile, sales in the existing-home market also took a dive last month, declining 3.8 percent to an annual rate of 5.75 million units. Moody's Economy.com chief economist Mark Zandi laments, "Instead of ending soon, the housing market downturn is likely to extend through 2008."

But the NAR (national association of realtors) hasn't helped either.  They have depicted a far too rosy picture to the public.  This has resulted in homeowners being unwilling to lower prices to get rid of the inventory.  Home builders have been slashing prices to get rid of inventory, but sales of existing homes have not followed suit.  This is due to realtors being either inept, sellers being ignorant, or a combination of both.  But this has been perpetuated by the disinformation and propoganda of realtor organizations to try and lure buyers to buy.  Instead they should have been encouraging sellers to lower prices.  Buyers will buy when prices drop.  It's the law of supply and demand that many realtors can't get through their thick heads.