The worst housing financial crisis in decades is going to get worse, a Merrill Lynch report said Wednesday.

Merrill Lynch forecasts nationwide U.S. home prices could decline 25% to 30% over the next three years, as new supply and weak demand weigh on the market. The investment bank forecasted a 15 percent drop in housing prices in 2008 and a further 10 percent drop in 2009, with even more depreciation likely in 2010.

"This sounds dire... but would only reverse part of the unprecedented 130% price surge from 2000 to 2006," wrote Merril Lynch North America Economist David Rosenberg in a research note released Wednesday. Rosenberg added the S&P 500 may decline an additional 20% to 25% to breach the 1,100-point level if the market follows historical precedents at times when the U.S. economy is in recession.

This is in contrast with the National Association of Realtors (NAR) expectations that home prices will remain flat in 2008. NAR did cut its home price estimate for the current quarter, however, to a 5.3 percent year-over-year decline, which represents the steepest drop in that price measure on record. But NAR sees a reversal in increase in home prices trend 2nd part of 2008.

But for those who think that the worst is over, Merrill Lynch said that housing prices still remain comparatively high. The brokerage believes that home prices are still far above historical norms when compared to other measures such as rent or GDP. "By our calculations, it will take about a 20 to 30 percent decline in home prices to correct this imbalance," said the report.

Merrill Lynch believes that housing starts will most likely slide another y another historic low of 30 percent by the end of 2008.

The report says that the inventory situation only continues to worsen, as homebuilders are now looking at more than nine months' inventory and that the current supply/demand environment will not favor a swift recovery in the housing market.