Something that might have been unbelievable in 2005 happened yesterday. The second largest mortgage company in the U.S., Freddie Mac, reported a net third quarter loss of two billion dollars. Upon the news, the stock tanked 29% -- its biggest one- day gain since the company went public 20 years ago!

Along with Fannie Mae, the two mortgage companies have about 40% of the U.S. home mortgage market. And collectively the two have lost forty-one billion dollars in market value so far in 2007. This loss pales in comparison to the $400-billion Deutsche Bank is estimating the fallout from the subprime mess will eventually cost.

Back in 2005, I was writing about how the real estate bust would be bigger than the boom. As a real estate man, I've never seen a prosperous boom that was followed by a hurtful bust. (I'd like to see where all those analysts are today who said the bust would not be that bad. They are either hiding under a pillow or broke.)

Early in 2007, I forecast that, for the first time since the Great Depression, the median price of a home in the U.S. would fall this year. Maybe the CEO of Wells Fargo reads my column -- last week he came out and said the housing rut is the worst since the Great Depression. The CEO of Fannie Mae is more pessimistic, as he sees house prices falling four percent in 2008. (They should get together with one of the Toll brothers to talk about the good old times of selling consumers homes they really couldn't afford.)

The bottom line is simple: I predict more than one major financial institution and builder will fail because of the severity of the housing market. Freddie Mac is already below its capital requirement and needs to raise money fast.

As for the stock market, it continues along its merry way oblivious to what is happening to homebuyers' wealth. In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.