Thirteen months ago, I wrote about the sad state of builder confidence as reflected in the NAHB/Wells Fargo Housing Market Index, which had sunk all the way to 30 -- its most pessimistic level since the early 1990s.

I used some pretty strong language, suggesting that the slump was “here to stay” and that there was “nowhere to hide.”

As it turns out, I was far too cautious. Not only have conditions remained bad, but builder confidence deteriorated beyond what we could imagine a year ago. In the latest report, the index has fallen all the way to 20, a level last seen in January 1991, when mortgage rates were in the neighborhood of 9.5 percent.

Keep in mind that as the index is calculated, anything above 50 reflects builder optimism and anything below that is negative. There are three components, two of which are at all-time lows. When asked about expected sales of single-family homes, only 26 percent were positive – a full five percentage points below the previous low of 31 set just a month earlier. The score for actual sales of single-family homes was at 20. And the index weighing traffic of prospective buyers was the worst of all – 16.

I put a lot of stock in these numbers, because builders tend to have front-row seats in this business. When times are good, they leverage their bets, enabling them to maximize their returns. But when things go sour, they can find themselves in the uncomfortable position of making big interest payments on empty homes. So you can bet they keep close tabs on how many people are looking, and how many are buying.

Is there any good news? If there is, it may be that prices are finally beginning to drop. Moody’s Economy.com predicts that prices will decline by more than 10 percent in 86 of the 379 largest housing markets. The average decline projected by Moody’s is 7.7 percent.

I realize most sellers consider falling home prices a negative, but the laws of supply and demand trump nearly everything else. When the market’s awash in homes and the supply of money is reduced by the virtual disappearance of the subprime market, the only way to reduce the record inventories is to reduce prices until people start buying.