As it has in times past, real estate has led this nation into recession, and it will lead us out as well — when the signs are there for a recovery. We’re now mid-way through 2008 and the signs aren’t there yet to say for certain that we’re over the hump and on the way out of recession. But a recession it is nonetheless.

But real estate — housing prices to be precise — is the sign that forecasters at the A. Gary Anderson Center for Economic Research at Chapman University are looking to lead the way back to prosperity.

In their June 2008 issue of the Economic & Business Review, the U.S. Forecast article for 2008-2009 is entitled, “The Recessionary Outlook: Housing Prices Will Determine Its Length and Intensity.”

“The Fed has moved aggressively into a stimulation mode,” said Chapman University President James L. Doti in presenting the national forecast to attendees of the university’s forecast update conference. “There’s no question that the Fed needs to dig in because of the potential for inflation.”

Banks are holding back on all types of lending, the report notes, and probably for good reason considering the $300 billion in write downs already taken by the nation’s financial institutions, with the prospect of more on the way, depending on which direction home prices go in the future.

Median home prices have already dropped 13.6 percent from their peak of $227,333 back in Q3 2005. “The most dramatic decrease since the Great Depression,” Doti noted.

The housing “bubble” which occurred due to the abuse of subprime and other exotic financial vehicles has now burst, causing home prices to decline back to the level where housing affordability is back to the level it was before the subprime boom hit (a home price to income ratio of  3.3), the Chapman report notes.

Other highlights of the Chapman forecast update are:

• The annual number of housing starts has reached a recent low of one million units. So pent-up demand for housing will increase and quickly cut into the 10+ month inventory of vacant and unsold housing
• The lagged effects of the housing price drop has reduced household wealth by $2 trillion. This is expected to reduce consumer spending by about $100 billion.
• The overall impact of the administration’s stimulus checks will be minimal as consumers use a good share of the money to pay down debt
• Housing prices will depreciate 6.1 percent in 2008 with a mild uptick in 2009
• The Fed will raise the Federal Funds Rate by 100 basis points (1 percent) in 2009 which will be mirrored in other short-term interest rates
• Stable to moderately increasing long-term interest rates

“I think it’s going to be a mild recession followed by a mild recovery,” Doti said.

Chapman also has a econometric model in their computer system to predict the outcome of the national election which has a very good record at correctly predicting the next president based on certain economic factors.

As for election 2008, the winner (according to Chapman) will be…..

Barack Obama by a 2.4 percent margin of victory.

What this means for the future of foreclosures in this country? As for the election, it’s hard to tell. As for the economic outlook, if it comes to pass the way the Chapman forecasters are predicting, a mild recovery could lead to a bit of a softening in foreclosure levels. However, this most likely will be countered by the expected reset of interest rates on many more option ARMs this year and next.

Bottom line: we’re not over the hump yet. Foreclosures are here to stay for the foreseeable future.

What do you think? We’d like to hear from you and get your opinions on these economic projections.