As the new year drawns, A blood-red sun rises on the horizon, warning of even bigger troubles for home builders than they experienced during a disastrous 2007.

Too dire a forecast? Not according to the economists, analysts, and other industry experts BUILDER consulted for this story. Major financial institutions, along with home builders large and small, will be dragged into bankruptcy and some will go out of business before the year is over, the experts say.

“We'll see a number of major builders file,” says David Shulman, senior economist at the University of California at Los Angeles Anderson Forecast. “You have to see that it's part of the clearing out process. It's ugly. We're going to have the mirror image of the joys of 2005 in how depressed people will be.”

Factor in growing economic tumult and increasing chances for recession in the broader economy, and we couldn't offer up a typical forecast for 2008. So BUILDER set out to learn what factors will facilitate an eventual recovery and where the metrics need to be for home building to rebound.

The leading indicator for recovery named by our experts was the reduction of high levels of inventory of new and existing homes for sale. Obviously, demand, as seen through home sales, needs to increase as well. But before it does, home buyer confidence needs a boost, credit conditions need to improve, and home prices (new and existing) need to come down to a point where consumers value affordability over the possibility of prices falling still further, which in turn will cause them to pull the trigger and buy.

At present, one of the greatest challenges for home builders is that their potential customers are struggling to sell their current homes. Some are having difficulty getting the price they desire and some can't seem to find a buyer at any price. Would-be first-time buyers for these existing homes are having trouble getting financing, and those looking to move up to a larger existing home can't sell their current home, many experts say. It's a vicious circle that stymies efforts at all levels.

While some optimists are heralding the end of the housing recession, it appears to some that a bloodbath may be just beginning. Several top home building consultants with access to the financial information of private builders say it looks bad.

“I'm very upset for a lot of my private builders,” says Ivy Zelman, founder and CEO of Zelman and Associates. “There are a lot of builders that are going to run out of cash in March, and there are going to be more foreclosures and insolvencies than I would like to admit.”

A MARKET OVERSUPPLIED Rest assured, however, conditions will change, and consumers will once again start buying both new and existing homes. But that's going to take time, and sales of new homes are not likely to find a bottom until the end of 2008 or 2009 when they hit somewhere close to 600,000 units, say some of our experts. Others see the bottom occurring somewhere around 700,000 units during 2008, with John Burns, president of John Burns Real Estate Consulting, in Irvine, Calif., boldly predicting sales to have already hit bottom in the fourth quarter of 2007.

One of the major factors impacting demand for new homes is the overwhelming abundance of vacant housing units. Oversupply caused by overbuilding is being augmented by foreclosed properties and by houses that builders sold only to have the buyers cancel on them. However, homes that are once again for sale due to cancellation are not accounted for by either new-home sales data from the U.S. Census, or the existing-home data put out by the National Association of Realtors. This has created a shadow inventory of massive but indeterminate size.

Learn more about markets featured in this article: Los Angeles, CA.