Ask the average guy on the street about things like European Central Bank support for Greece or the intricacies of the deficit debate in Washington, and watch his eyes glaze over.

You might hear something like "those euro-socialists deserve it" or "politicians can't get anything done" -- but the topic will quickly shift to something more aligned to the national interest. Even if it's the Rush Limbaugh contraceptives furor.

For most Americans, there are only two economic data points that matter: the unemployment rate and the strength of the housing market. Both have been showing signs of life, with the jobless rate dropping to 8.3% while home sales, builder confidence and home inventory-for-sale have all improved.

Time to pop the confetti and buy a few Miami condos?

Not quite. Unfortunately, both areas have been misleadingly positive. I gave you my take on the job market in a recent blog post, "Why the job market still stinks." Now, I want to warn you about housing.

Image: Anthony Mirhaydari

Anthony Mirhaydari

The truth is, a combination of factors is set to push national home prices down an additional 10% or so before a hard bottom is found. And if Europe's debt mess and fiscal bickering in Washington result in another recession, the drop could be double that.

Here's why.

Next leg down has already started

The problem with much of the recent enthusiasm is that it's been based on rising home-sales data, which when put in percentage terms by headline writers, makes the gains seem dramatic. Take last month's report on existing-home sales. On a month-over-month basis, sales were up 4.3%; great news!

But at 4.6 million units annually, the sales rate is pitiful compared with the 7.3 million sales peak hit in 2005.

Also bolstering sentiment has been a drop in the supply of housing available for sale. At 6.2 months of supply, the market has returned to "normalcy."

Again, this is misleading. Because of the "robo-signing" foreclosure scandal, the big banks have dramatically slowed the rate at which they push delinquent homeowners through the foreclosure process. Until they iron out the wrinkles, they would rather let deadbeats get a free ride than compound what was already a public-relations nightmare.

The specifics? Data from RealtyTrac show that the number of foreclosure filings has dropped from the 2008-2010 running rate of around 100,000 per month to closer to 60,000 per month now. Because of this, the time between a borrower going 60 days delinquent on a mortgage and liquidation of the property has increased to nearly three years -- up from just five months in 2004.

With the five largest banks and the government reaching a settlement in February, all those postponed foreclosure filings are about to move forward -- unleashing a wave of distressed properties into a weak market. Gluskin Sheff chief economist David Rosenberg notes that when this complete "shadow inventory" of homes is properly accounted for, that number for months of supply on sale in the housing market will jump from 6.2 into the double digits.

Even narrowing the inventory to just homes that are vacant with a "for sale" sign in the yard, there are still around 3 million excess residential housing units on the market. That means that even if builders stop all activity and no new homes come to market, it would take nearly eight months to clear them out.

No wonder prices are weakening again. According to Standard & Poor's Case-Shiller Home Price Index, prices have fallen eight months in a row and have reached new post-bubble lows, with prices returning to levels not seen since late 2002. In other words, although the recession officially ended in 2009, the housing market continues to weaken.

iShares Dow Jones U.S. Home Construction Index exchange-traded fund chart © StockCharts.com

Hardly a reason for optimism. And yet the iShares Dow Jones US Home Construction ETF (ITB), charted above, has nearly doubled off of its October low.

(Before you accuse me of acting like Chicken Little, a bit of disclosure: I recently bought a home. So while the market might still be unsafe for speculators and condo flippers, I do think they are attractive deals out there for long-term owner-occupants.)

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Reality is setting in, however. Economists up and down Wall Street are marking down their growth forecasts as data on things like durable goods and factory activity disappoint. And now, the ITB exchange-traded fund is in the midst of a new downtrend, nearly 8% off its high as it drops below its lower Bollinger band -- a sign of intense selling pressure last seen during the August market meltdown.

The heavy hitters in the sector are looking similarly weak. DR Horton (DHI, news) is dropping out of a three-month topping pattern in a huge way. Others including Toll Brothers (TOL, news) and Pultegroup (PHM, news) are similarly looking vulnerable to a medium-term pullback.

There's good reason for investors to head for the exits.

How far down?

Michelle Meyer at Bank of America Merrill Lynch is looking for an additional 8% drop in home prices through the end of the first quarter next year, assuming the economy remains buoyant. That also assumes that the foreclosure overhang remains tolerable with an additional 8 million homes liquidated by the end of 2015.

The scary thing is Meyer's model is extremely sensitive to shifts in both the amount of housing inventory and the number of distressed foreclosure properties being sold. Her downside scenario, which would see prices drop an additional 20%, is based on inventory jumping to nearly 12 months' of supply by 2013. According to Rosenberg's calculations, we may already be close to that level.

An additional 20% decline would put the cumulative, post-bubble home price drop at 46% and return home prices to levels last seen in 2000. And the risk is that this weakness becomes self-sustaining, since additional home price weakness would pressure the banks to further tighten mortgage lending, pressure household spending via reduced wealth, and pressure the government via increased budget deficits as economic activity slowed.

So not only is the housing market far from "safe" by any traditional definition of the word, it's very likely that a double-dip in home prices could slam the brakes on an already feeble recovery.

Glimmers of hope?

It's not all black and blue. For one, any new recession would suffer a smaller drag from housing since construction activity is already low -- and is, in fact, rebounding because of rising demand for multifamily and apartment units. After all, people still need places to live even if they can't or don't want to be homeowners. And that explains why rental rates are now rising around 2.5% a year as vacancies fall.

(My motivation for buying was how this impacted the affordability of owning a home versus renting.)

The other over-the-horizon positive that should eventually stabilize home prices is simple human nature. Americans like to reproduce. And foreigners still want to immigrate to our shores. This demographic tail wind will keep demand for housing units on the rise.

Meyers quantifies this by looking at the household formation rate. It's been depressed lately as 20- and 30-somethings move back in with Mom and Dad and homes become increasingly multigenerational out of necessity. In a normal environment, around 1.2 million households are created each year. But in the past four years, this pace has slowed to just 500,000.

It isn't sustainable without a major cultural shift. We're the land of open spaces, SUVs that could double as urban warfare vehicles, value meals, and unshared bathrooms. And as people move out, they'll be on the prowl for cut-rate McMansions of their own.

Overall, Meyer's home price model shows home prices turning higher in 2014 (after overshooting to the downside) and returning to fair valuation by 2019.

That means the current excitement amounts to little more than another false dawn. Back in January 2010, Wall Street was looking for housing starts to average 1 million in 2011. But the actual pace was about 600,000. This year, initial forecasts were for 900,000 versus 700,000 now. Eventually, perception will catch up to reality as widespread investor pessimism sets the stage for an upside surprise in two years' time.

But we're not there yet.

At the time of publication, Anthony Mirhaydari did not own or control shares of any company or fund mentioned in this column.

Be sure to check out Anthony's new money management service, Mirhaydari Capital Management, and his investment newsletter, the Edge. A free, two-week trial subscription to the newsletter has been extended to MSN Money readers. Click here to sign up. Mirhaydari can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

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ETF and stocks mentioned in this article: iShares Dow Jones US Home Construction ETF (ITB), DR Horton (DHI, news), Toll Brothers (TOL, news) and Pultegroup (PHM, news).