American Dream's Harsh New Reality

The foreclosure estimate also is based on the projection that the national median price for homes will fall just over 10% from its peak in late 2005 to a trough that Zandi estimates will occur in late 2008.

For the first half of this year, about 573,000 U.S. households have entered the foreclosure process, up 58% from the same period a year ago, according to RealtyTrac. Rick Sharga, marketing director of the firm, says he expects between 1 million and 1.2 million households to ultimately begin the foreclosure process this year, up from 735,000 a year ago.

A big determinant of where the default rate ultimately settles out is housing prices. In the second quarter, prices fell 3.2% from a year ago, the largest decline in at least 20 years, according to the S&P/Case-Shiller home price index.

The increasing inventories of homes for sale will continue to put downward pressure on pricing. Buyer psychology also will have an important impact on where prices go and may hurt foreclosures even more, says Robert Shiller, a Yale economist and co-creator of the home price index.

"The problem could get much worse if home prices continue to fall and put more people into the negative equity, or marginal equity category," Shiller says.

The issue could be further exacerbated if homeowners begin to worry that long-term housing prices are no longer rising.