The willingness and ability of Americans to return the housing market over the next few months will determine fate of the U.S. economy. Many economists say that home prices have another 10% to fall to bring them at par with rents and incomes. Wall Street has already priced in a 10% decline, Zandi of Moody's Economy.com said, so that should imply healthy stock market rally and ease the pressure on banks as well as Fannie Mae and Freddie Mac. But a further clampdown by private lenders or a meltdown at mortgage finance companies Fannie Mae and Freddie Mac would push home prices down much more severely, perhaps more than 20%, which would likely lead to a deep recession. Analysts at Credit Suisse estimate that the S&P Case-Shiller Index of house prices in 20 major cities must fall by another 14% for houses to become affordable again, assuming the typical mortgage rate stays around 6.32%. The index was down 15.8% from a year earlier in May.

If borrowing costs eased to 5.5%, the Case-Shiller index fall by another 7%, Credit Suisse said, but if rates rise to 7.5%, house prices may tumble another 24%. A 24% decline would wipe out the entire home equity for millions of homeowners, many of whom were depending on their homes to finance their retirement or pay for their children’s college education. Without that nest egg, spending would suffer; triggering a consumer-led recession that some economists predict would be the worst since the early 1980s. Meanwhile, the Federal Reserve's latest survey of senior loan officers showed banks tightening terms on a host of loans, including mortgages to prime borrowers with good credit, an ominous sign for the housing market. "The tightening in the supply of mortgage credit is probably the last major obstacle standing in the way of a sales stabilization," Citigroup economist Steven Wieting said.