CalculatedRisk isn't buying it:
Since analysts are finally getting realistic on their house price projections, further house price declines (that are in line with those projections) will not impact the value of MBS! So the Hubbard and Mayer vicious cycle analysis is flawed. The apparent "vicious cycle" was caused by incorrect forecasts by analyst and economists of future house prices.
<http://www.calculatedriskblog.com/2008/10/housing-bad-policy-proposal.html>
and:
One of the tragedies of the housing bubble was that some people were enticed to buy a home before they were really ready to be homeowners, and others to extend themselves too far. Many of these people are now soured on the wonders of homeownership, and they will not be buyers for an extended period of time. Only the passage of time will salve their wounds. There is nothing anyone can do to convince them to buy right now. I've seen this behavior before in California after previous (and much smaller) bubbles - and I believe we will see it again now. I wonder how this behavior factors into the author's forecast.
<http://www.calculatedriskblog.com/2008/12/bad-housing-policy-proposals-never-die.html>
Shane