The housing market has shown some encouraging signs of strength in recent months, but analysts caution that the market is mostly responding to powerful government stimulus measures and is not healthy enough to keep growing on its own after the withdrawal of federal aid.
One major challenge: The Federal Reserve has said it would soon stop purchasing home mortgages after accumulating an unprecedented $1.25 trillion of them since January in an attempt to keep 30-year mortgage rates near or less than 5 percent.
Some analysts predict the Fed will be forced to keep buying mortgages to prevent a sudden increase in interest rates and collapse in housing. They note signs this fall that housing was again teetering after enjoying a good run of buying activity in response to a temporary housing tax credit that prompted lawmakers to reverse course and extend and expand the credit through April 30.
Dean Baker, co-director of the Center for Economic and Policy Research, said the market has seesawed in response to Congress' and the Fed's ministrations, with home sales soaring to a two-year high one month as buyers rushed to take advantage of the $8,000 tax credit and mortgage applications plummeting to a 12-year low the next month as buyers pulled back in anticipation of the credit expiring.
Congress' decision to extend the credit should keep the market "reasonably stable" for another few months, he said, but housing sales and prices will be under pressure again by the spring, when the Fed withdraws from the mortgage market.
"The end of these purchases will almost certainly raise interest rates" by as much as a full percentage point, he said. "While this would still leave 30-year mortgage rates at a relatively low 6 percent, this would substantially dampen the housing market."
The market could get a double whammy with the expiration of the expanded tax credit on April 30 shortly after the Fed program ends, he added.
Moreover, a slowly moving tidal wave of defaults and foreclosures on a record 15 percent of all home mortgages means that banks will keep taking over millions of houses and putting them on the market for sale, further depressing conditions.
"The underlying glut in housing means that it is only a matter of time before house prices begin to fall again," he said.
Frank Lee, a housing analyst at CreditSights, said no one should be deceived by the pickup in home sales and prices this spring and summer.
"The government's various efforts to support the housing market appear to be bearing fruit, but when this support ends, home prices - along with other measures of housing activity - may well start to weaken again," he said.
"Government initiatives have only likely resolved housing symptoms temporarily, and not the underlying problems - that is, high unemployment and the continued rise in mortgage delinquencies and foreclosures."
Although the deep and prolonged recession in the housing market began with the collapse of the subprime mortgage market in 2007, the biggest problem for housing now is the loss of jobs, income and confidence among homeowners and potential homebuyers as the recession has deepened, he said.
"Employment is the primary driver of housing demand," he said. "If one is not gainfully employed, it will be very difficult to purchase a home that requires financing."
Job cuts have multiplied into the millions in the past year, driving unemployment over 10 percent and leaving nearly 16 million people looking for work. As people lose jobs and their unemployment benefits expire, within months they are unable to pay their mortgages and often are forced to give up their homes to foreclosure, heightening the problems in the housing market.
The worsening employment and foreclosure situation has created an enormous "shadow inventory" of as many as 6 million homes that are not for sale right now but are likely to deluge the market as banks put them up for sale in coming months, analysts estimate.
Mr. Lee said it would take a year and a half to sell all those homes, on top of already plump inventories of more than 4 million existing homes for sale.
The huge overhang of bad debts and foreclosures will weigh on the housing market for a long time, he said.
"It could take years for the housing sector - especially the home-building industry - to recover to normal operating conditions," he said.
Despite the great magnitude of the housing and debt crisis, which plunged the United States and global economy into the worst recession since World War II, many people continue to underestimate the extent of the damage or comprehend how long it will take for the markets to return to anything like normal, said Whitney Tilson, an executive at T2 Partners LLC and co-author of a book on the mortgage meltdown and housing crisis.
"The collapse of the U.S. housing market, the world's largest debt market, is the defining economic event of our lifetimes," he said. The large drop in housing prices after the bubble burst rivaled that of the Great Depression and has major consequences that are still playing out and will depress the market for some time, he said.
Mr. Tilson expects an additional 10 percent drop in home prices by next spring - which, coming on top of the more than 30 percent average decline already seen across the country, would bring prices in line with the historical trend for home prices in the United States.
But because so many homeowners greatly increased their mortgage debt during the boom years, such a further decline in prices would be enough to wipe out all the remaining equity of most American homeowners who have outstanding mortgages, he said.
That would leave most homeowners "under water." People who are "under water" are unable to sell their homes or refinance them without help from the government or their lenders, and as a result are far more likely to go into default or walk away from their homes, analysts say. Thus, decisions made by this vast majority of homeowners have the potential to string out the housing crisis for some time to come.
That is why "recent signs of stabilization are likely the mother of all head fakes," Mr. Tilson said, and are largely because of the temporary support the market is receiving from Congress and the Fed. He estimates that the nation is only about halfway though processing the tidal wave of defaults and foreclosures spawned by unemployment and the housing crisis.
That means the dire conditions that led to large-scale government intervention will continue for some time, he said.
"The key question is whether housing prices will go crashing through the trend line" and fall even more than 10 percent further, he said. "This is a real possibility, though continued massive government subsidies could prevent it."