How the Housing Market Is Fighting Its Way Back

If you'd like to get a sense of how we're emerging from our nationwide housing malaise, sit down at Jillian and Aaron Roberts' kitchen table. As 2-year-old twins Lennon and Miles run by — those divots in the table are their doing — the couple explain that when they first started looking to become homeowners back in 2006, there was little they could afford. "Even a modest home was too much for us," says Jillian, recalling the go-go years of real estate, when a young family like hers didn't stand a chance of getting into the game.

By last winter, the game had changed. When the couple started looking at houses again, they found plenty in their price range. The western suburbs of Boise, Idaho — four- and five-year-old neighborhoods scattered among hay farms and potato fields — are no longer a favorite stomping ground of out-of-state speculators, no longer a surefire way to get rich in real estate. (See pictures of Boise's struggling housing market.)

For people simply looking for a place to live, though, deals abound. The house that the Robertses finally bought — with three bedrooms, granite countertops and textured walls — had been listed at $315,000 before its owners fell into foreclosure and the bank took over. The Robertses paid $169,000. "We never thought we'd be able to have such a nice house," says Jillian happily.

Yet there is discomfort in her voice too. Even though the Robertses represent one of the great forces working to bring the country's housing market back to health — nearly a third of home sales are now to first-time buyers, thanks to a federal tax credit and a glut of foreclosed and other cheap properties — they are constantly being reminded of how sick the rest of the system still is. The couple rattle off houses in their new neighborhood that are for sale by desperate, underwater owners. Through the Robertses' kitchen window, they can see tall weeds in the empty lot next door. Their house was built in 2005, but then the crash came. The builder has yet to return to finish the development. (See pictures of high-end homes that won't sell.)

This, you might be asking, is the good news? Well, yes, it is, because a housing recovery isn't just about bottoming out on price. What is more important for a healthy market is that there be a prevailing logic or reason — rooted in local neighborhoods, in local economies — for houses to cost what they do. And that sort of logic, as illustrated by Boise, is reclaiming the housing market from coast to coast.

The New Normal
Now, there are signs in some places that we are nearing an end to the downward spiral that reduced house prices 32% nationwide and, according to the Mortgage Bankers Association, erased $3.5 trillion worth of home equity. New-home sales are ticking up, and for the first time in three years, the S&P/Case-Shiller home-price index, which tracks changes in home prices in 20 U.S. cities, has shown a monthly gain.

But don't get too excited. Once you take into account that houses sell for more money in the spring, that increase in the Case-Shiller data disappears — and Moody's Economy.com is still forecasting an additional 11% drop in home prices nationally.

More important than absolute prices, though, is how they relate to what people earn. To gauge housing affordability, the data shop Fiserv compares the cost of houses with household income. By that count, homes nationwide at the end of March were only 7% more expensive than they were in 2000, before the bubble. In some markets — including Phoenix, Atlanta, Las Vegas and San Jose, Calif. — they were actually cheaper. In a way that they haven't in a very long time, home prices are starting to make economic sense.

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