The normal law of supply and demand does not apply in the current U.S. economic state – whether home prices go up and down, supply remains high and demand remains low. And not for the first (or maybe even last) time, analysts and economists are questioning government intervention in the housing market.

Recent evidence shows that U.S. home prices may continue to slide in the next three years. Even with that prediction, 12 million more properties are expected to hit the market as shadow inventory – or foreclosed homes and homes in default – is expected to be sold. This expected supply, though, is what’s preventing the market from reaching its rock bottom prices after plunging 28% from 2006.

According to Fannie Mae , Moody’s Analytics Inc., Morgan Stanley, and Barclays Plc. Analysts, the expected shadow inventory is only an add up to the vacant houses and houses expected to be sold by their owners as soon as a slight improvement in the market occurs.

“Whether it’s the sidelined, shadow or current inventory, the issue is there’s more supply than demand. Once you reach a bottom, it will take three or four years for prices to begin to rise 1 or 2 percent a year,” says San Francisco’s Morgan Stanley’s U.S. housing strategist Oliver Chang.

The continually increasing supply is threatening to undermine the efforts of the government to save the housing market. In fact, the government can also be ‘blamed’ for the rise in supply: with the Home Affordable Modification Program (HAMP), some owners with new loan terms are expected to re-default. According to the Treasury Department, half of the 2009 modifications were behind in payments during the first half of the year.

Bailout Nation author Barry Ritholtz described government efforts as ‘delaying the day of reckoning’. Even as tax credit stimulated sales and modifications delayed foreclosures, the market did not really stabilize – it only put off the market’s inevitable fall to the bottom.

Even Nomura Securities International Inc. economist Zach Pandl said that recent home price stabilization was just an ‘illusion’. For him, though, delaying the market recovery is still a positive thing: it kept foreclosures off the market and minimized the influx of home supply.

Forecasted home sale for this year was lowered by Fannie Mae. The largest U.S. mortgage refinance company says that year 2010 will compare 7% lower than 2009’s home sales. Even home prices are expected to drop 5% by 2013, according to chief economist of Moody’s Analytics Mark Zandi.