Home prices will continue to decline rapidly, and won't bottom out for at least 18 months, said Whitney Tilson, managing partner of T2 Partners hedge fund.

Defaulting prime mortgages will drive the next phase of the credit crunch, which has so far been led by the resetting of subprime mortgages orginated in 2005 and 2006, and option arms, said Tilson, who is short the housing market.

• Track 30-Year Mortgages and Option ARM Resets

There are two possible causes for these defaults, he said. Either people can't afford the monthly payments to their dream home in an overpriced market, or they weren't really a prime borrower — just someone with a high FICO score.

Regardless, these option resets will cause more defaults, which will further deflate prices, Tilson said.

"We're clearly in a 'V'," he said. "The question is, have we reached the bottom of the 'V'? I think we're probably halfway down that 'V', and that spells trouble."

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