It’s one of the investment community’s harshest housing outlooks I’ve come across. In brief, the rapidly weakening housing market, as one investment newsletter sees it, could turn into a housing horror show before year end. Martin Weiss, the usually perceptive editor of Safe Money Report, a 28-year-old monthly newsletter out of Jupiter, Fla., and his sidekick, associate editor Michael Larson, lay out worrisome data to support their ominous outlook:

* Nationwide, the inventory of unsold existing homes is at the highest level in 18 years.

* The backlog of new homes is at an all-time high.

* Empty condos are piling up like dead birds in a pandemic.

* Housing inventories are up 15% more than sales.

* Median new home sales nationally are starting to slump, with speculators running for the hills and condo construction deals being canceled in many hot markets.

* Centex, a leading homebuilder, recently offered “$30,000 off” coupons in one region and promised savings of up to $100,000 in another. Likewise, another builder, D.R. Horton, just ran a “prices slashed” ad in California, offering discounts of as much as 31% on new homes.

Making matters worse, homeowners are starting to default in growing numbers. In the final three months of 2005, for example, California’s default notices jumped 19%, while foreclosure filings in Massachusetts have surged 32% and are running at the highest rate since the early 1990s. Likewise, the delinquency rate at Fannie Mae just surged to its highest level since 1989.

Messrs. Weiss and Larson argue that the housing boom of the 2000s is “turning into the housing bust of 2006.” What’s more, they view the current housing bubble as “potentially more dangerous than any financial bubble in history.”

Against this backdrop, various governors of the Federal Reserve and prominent realtors send this message: Housing will rust, not bust! Their general view is that the strengthening economy, abetted by spiraling global growth, has the sufficient muscle to offset a slowdown.

That’s not what you’ll hear from Messrs. Weiss and Larson, who view the “rust, but not bust” scenario as terribly naive. They tell me that home prices will start rolling over later this year. Further, they think that between 2006 and 2009 prices could tumble 10% to 15% and perhaps as much as 30% in many areas of the country, notably on the East and West Coasts.

The most vulnerable locations are thought to be Miami, Los Angeles, San Francisco, Las Vegas, the greater New York area, Arizona, Boston, and Rhode Island. Our housing bears also see housing-related stocks, most of which have retreated sharply from their recent highs, undergoing further significant declines, say 10% to 20% over the balance of the year. And within three years, Mr. Larson says, the stocks could get cut in half from current levels.

Included here are homebuilders such as Lennar, Centex, and Toll Brothers; home improvement retailers such as Home Depot; lenders such as Golden West Financial and Countrywide Financial; sub-prime lenders like New Century Financial, and construction suppliers such as Masco.

Major homebuilding companies, it’s thought, could also be forced to file for Chapter 11, while others may simply close and liquidate their assets.

The bottom line, as Mr. Larson sees it: Because of the ridiculous financing, which includes mortgages that require no proof of income and interest-only loans that require no payment of principal, plus tremendous oversupply and massive speculation, “the housing slump is certain to run longer and be more painful than people expect.”

What about the economic impact? Our housing bears see severe consequences, noting that never before in history has the economy relied so much on housing. For example, in 2005, 55% of the growth in GDP was derived from housing-related activities. At the same time, homeowners pulled a whopping $243 billion out of their home equity through first mortgages alone. Including second mortgages, equity loans, and other cash-out vehicles, they raised an estimated $800 billion from their homes.

So during the real estate boom, Americans felt rich and spent lavishly. But now, with home values falling, Mr. Larson says, “We witness just the opposite effect: Pocketbooks snap shut and spending for luxury items evaporates.”

Heightening the risks, he points out, American households have far more money invested in real estate than they ever had in speculative stocks, with a record 69% owning their own homes. Their debt payments at 13.75% of their disposable income are also the highest ever. It means, Mr. Larson says, that their total debt burden – more than $11 trillion – is almost as large as the country’s entire GDP.