Although the housing crash is over in the United States, many negative effects continue to reverberate through the economy and will hold back housing demand in the short run before home prices can be expected to achieve a sustained pace of appreciation. The authors share a number of perspectives and metrics on the housing market, ranging from comprehensive house price measures to demographics that historically generated much of the gains in homeownership.

Historically, the best leading indicator for the economy and employment has been housing. A declining U.S. housing market was closely intertwined with the 2007–09 economic recession, and since then, housing has been a persistent drag on the recovery. Housing’s role in the overall economy remains diminished by five years of rising foreclosures and falling prices, but it will still be a key economic driver in any sustainable future recovery. Housing is a small share of GDP, but it can be a big part of GDP growth; housing markets are headed upward, even if the pace of activity is weaker than normal.

In addition to structural improvements in the industry, such as the decline of piggyback structures that were popular during the housing boom, the authors address the political impact of the inability of the U.S. Congress to decide the fate of the government-sponsored entities (GSEs) in private lending, to address the regulatory bottleneck caused by the unresolved definition of what constitutes a qualified mortgage, and to deal with the impact of the impasse on bank capital requirements.

The authors explore long-term fundamental factors behind the two leading drivers of home ownership: housing as a consumption good and housing as an investment good. They pull their data from such sources as the U.S. Census Bureau, National Association of Home Builders, Equifax, and Mortgage Bankers Association, as well as their own company’s analytics.

The recovery in real estate is just beginning, and underwriting standards are extremely tight as lenders grapple with existing distressed mortgages. But as house prices begin appreciating again, the wealth effect is positive and housing will regain its appeal as an investment. In addition, with mortgage rates reaching a record low of 3.5%, investor demand for foreclosed properties continues to be high.

The outlook for housing consumption is also good. Millions of homeowners still owe more than their properties are worth, but a record slow pace of homebuilding has pushed the supply of new homes available for sale into a 20-quarter slide to record lows. Not only will an increasing rate of household formation from those in the 30- to 45-year-old age group lead to greater demand, but also many households that were foreclosed on will soon be passing the seven-year period required to repair credit.

Economically, job and income growth are important underpinnings to the housing outlook, but short-term influences, such as Hurricane Sandy, can be expected to have a dramatic impact on regional markets where high insurance payments can be expected to boost rebuilding.

The authors’ outlook for strong housing, modest growth, and average job creation reflects the currently available facts and seems very reasonable. Nevertheless, the authors work for a unit of a rating agency whose analysis is intrinsically tied to the market, banking, and housing crises. Independence issues aside, the authors’ optimism is balanced by a fair reporting of the many structural challenges and risks that continue to face the industry.