Looking for a clearing.

As October begins, there is no definitive sign the housing market's historic recession is behind us. The unemployment rate for September just inched up a notch to 9.8 percent, and job losses for the month were worse than expected. We are in seesaw mode--every few steps of improvement are followed by a few more of deterioration. We are still slowly crawling out of the deep mess that has been created--just like we have been for the last 12 months.

In this issue, we try to take stock of just how much farther we will have to go before we reach a true housing market recovery. To help in that exercise, an article titled "Back to Basics" traces just how far the boom took us into the stratosphere. The article by Ingo Winzer, president and founder of Local Market Monitor, Cary, North Carolina, gives us the perspective from the market's peak, so we can see how far we still have to plunge in some places to reach the "new normal."

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Take for example, Miami. From 2000 to 2006, home prices there went up by 164 percent, according to the Federal Housing Finance Agency (FHFA) Home Price Index. Winzer's article charts the runaway appreciation in other markets as well during this period, including Los Angeles, where prices climbed by 158 percent. Obviously, those were not healthy sustainable appreciation rates--they were bubble markets destined to burst.

Winzer's article also portrays the degree to which these expansive bubble markets were financed through the private mortgage-backed securities (MBS) market. In 2000, mortgage debt in private pools totaled $400 billion. By 2007, it had mushroomed to $3 trillion, according to data from the Federal Reserve.

Winzer's article also probes how consumer behavior toward housing morphed during this period. Homebuyers became speculators in residential real estate in a big way--and the financing was readily available to let them do so. The article cites numbers that show the percentage of home purchases made by investors in certain markets. In 2005, the investor share of home purchases hit 64 percent in Myrtle Beach, for example. Panama City and Naples, Florida, were close to 50 percent. So, in retrospect, we can see that the speculative conditions were well in place by 2005 for a spectacular fall. And that brings us to where we are today.

The Local Market Monitor's forecast calls for the national average home price to decline by another 5 percent during the period from this year's third quarter to next year's third quarter. The worst performer on Winzer's list of big-city markets for this period is Phoenix, where prices are forecast to decline by another 17 percent. Las Vegas and Miami are expected to drop another 16 percent in value.

So clearly, we are not yet out of the woods. But the good news is we may all have learned how to spot a bubble while it's still building. And that could mean we may not have to wait around until it bursts next time.

Janet Reilley Hewitt

Editor in Chief