The downturn in the U.S. housing industry began in numerous locations a couple of years ago, but at the advent of 2008, many of us expected the sun to shine again on the industry almost any day. How wrong we were!

A miscalculation
I'm sure my Foolish friends recognize the crucial role that housing has played in kicking off and worsening the economic malaise that we're all slogging through. And now, as I don my Chicken Little costume, I see reasons to expect tougher times in 2009 than we've yet weathered. But before I lurch into a prediction of what next year might bring for housing, let's take a quick peek at how the hacienda-building industry is concluding 2008:

  • House prices continued to plummet during the year. In fact, according to the latest S&P/Case-Shiller survey, prices in September were down 17.4% versus the same month in 2007. They're down 21.8% from housing's peak in July 2006.
  • The builders are anything but optimistic: The December reading of builder sentiment remained stuck at an all-time low of 9. That reading would have to ascend to 50 just for the builders to become wishy-washy.
  • The November foreclosure tally rose 28% year over year. Most forecasters believe we've only begun to scratch the surface in foreclosures.
  • Housing starts fell to an annual rate of 625,000 units in November. For the sake of perspective, they were around 2 million before the roof began to cave in.
  • New home sales slid by 5.3% in October, the last month for which figures are yet available. The latest adjusted annual rate was down to 433,000 units.

The builders' bouncy year
And how did the builders' share prices fare amid all of this chaos? Somewhat surprisingly, they were something of a mixed bag as the year moved along:

Company

12/31/07

06/30/08

12/19/08

Beazer (NYSE:BZH)

$7.43

$5.57

$1.65

Lennar (NYSE:LEN)

$17.89

$12.34

$9.99

Pulte (NYSE:PHM)

$10.54

$9.63

$10.92

Ryland (NYSE:RYL)

$27.55

$21.81

$19.07

Toll Brothers (NYSE:TOL)

$20.06

$18.73

$21.70

Of course, the other big events for the industry this year included getting the government involved -- or, rather, more involved -- in mortgage lending. The key occurrence easily was the government's early-September seizure of mortgage giants Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE). As the year comes to an end, other emerging federal initiatives to prop up housing include a Treasury Department effort to lower interest rates for homebuyers to somewhere around 4.5%.

What will 2009 bring?
So what lies ahead for housing in 2009? I'm betting you have some thoughts on the subject. I do, too:

  • Home prices will continue to slide. Some observers believe that the descent is only halfway completed. Layoffs will only exacerbate the problem. This isn't a trifling point, either: Until house prices stabilize, the economy can't begin to recover.
  • Foreclosures have already begun to spread from the subprime group to the middle mortgage tier (Alt-A's) and even to people with prime mortgages. Again, layoffs will tend to have an effect on this trend, as will the decline in home values. Of the $3 trillion in mortgages typically granted each year, nearly 60% are prime loans, and 20% each are Alt-A's and subprimes. So increased difficulties in the two highest categories also wouldn't be trivial.
  • You'll begin to see some builders experiencing catastrophic financial difficulties. I'm not predicting widespread bankruptcies, but I also believe it's logical that spot blowups could occur. On that basis, I'd advise that anyone with even a remote interest in the homebuilders keep a close eye on the companies' relative balance-sheet strength.

Hands off the homebuilders?
Should you avoid the homebuilders altogether as you construct your 2009 portfolio? Not necessarily. But I'd advise you to be very careful -- and patient. You'll notice in the table above that Toll Brothers closed Friday about 8% above its 2008 starting point. That hardly classifies it as a multibagger, but it beats the market handily in a tough year.

All of the homebuilders in our table have received one-star ratings from Motley Fool CAPS players. Why not add your votes on the group?

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Fool contributor David Lee Smith does have a mortgage, but he doesn't own shares in any of the companies mentioned above. He welcomes your questions and comments. The Fool has a disclosure policy.