Home prices will decline another 5% this year and hit bottom in early 2012 in a "best case" scenario, assuming home sales pick up in the second half of this year, according to analysts at JPMorgan Chase & Co.

But many factors could worsen that relatively optimistic forecast, says John Sim, a JPMorgan Chase fixed income strategist.

"We can easily see a 10% decline, and I think the mortgage bond investor community prices in that risk," he says.

The economic slowdown, high unemployment, tight lending, and the massive overhang of homes in the foreclosure process have "cast an ominous shadow over the housing market," Sim says.

Prices have stabilized somewhat because sales of foreclosed homes have slowed dramatically in the past year. But without a fundamental uptick in demand for new homes, the supply could easily increase as servicers push more houses through foreclosure. That would delay a recovery and "push out the bottom," according to Sim.

The JPMorgan Chase forecast is based largely on a projected pick-up in sales of existing homes. If home sales increase to between 5 million to 5.5 million units, Sim estimates that 2 million homes a year could be sold from the inventory of homes currently in the process of foreclosure.

Even if that does happen, "we will sit at the bottom" for home prices "for 2 to 3 years with no real growth," Sim says.

The National Association of Realtors says sales are on track to hit 4.9 million units this year, but the analytics firm CoreLogic claims home sales are actually much lower.

CoreLogic estimates that sales totaled 3.6 million last year, down 12% from 4.1 million in 2009. That is far less than the numbers reported by the real estate agents' group, which says home sales fell 5% last year to 4.9 million.

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