The housing market is clearly on the road to recovery. We already suspected that, but our suspicions were confirmed last week when the latest Case-Shiller indexes showed that home prices made the fastest year-over-year growth since the middle of 2006.  Home prices are on the rise mainly because the inventory of homes for sale continues to decrease. And, stock prices of homebuilders are rapidly increasing. KB Home, DR Horton, Toll Brothers, and the PulteGroup have all recently seen their shares approach 52-week highs.

With all of this good news, consumer confidence is getting much higher, but are the expectations too lofty?

It seems everyone is asking if how long it will take for home prices to get back to where they were in 2006 and 2007, before the housing bubble burst. But consumers may not want to hear one expert's answer to that question. “The hazard now is that people think normal is 2006, but we aren't going back there for a long time, maybe never,” said Case-Shiller index chairman David Blitzer.  Blitzer acknowledges that the housing market has made significant gains in recent months, but he says the overall recovery will be a slow and gradual one.

Why?

He points out the fact that there is a still a big foreclosure backlog in many states, plus there is an elevated number of homeowners who are underwater with their mortgages. According to Blitzer, these two factors have slowed the housing market's recovery efforts and could continue to plague it in the years to come.

The recent lack of inventory has driven home prices much higher over the past few months, but prices are still well below the peak numbers reached in 2006 and 2007. Blitzer says that those years should not be used as measuring sticks for success because they were at the height of the housing bubble, and aren't considered “normal” by industry insiders. In other words, consumer expectations are too high! Home prices are now back to August 2003 levels, but the shadow inventory could drag them back down.

What does that mean?

“Shadow inventory” is a real estate term for foreclosures that have not been sold yet, or homes that owners are delaying putting on the market until home prices increase. Basically, they are homes that aren't available yet, but are expected to be listed at an undetermined point in the future. Before the housing crisis, the average shadow inventory was about 500,000. Last summer, it stood at 3.1 million units.

Blitzer says the shadow inventory sits at about 2.6 million properties right now. Until they are cleared out, Blitzer says banks will limit how much money they lend out for home loans. Once the shadow inventory is reduced, banks’ balance sheets will back in a range where they feel comfortable lending out money again. If it seems that Blitzer only has bad news about the housing market, his predictions do include some positive notes as well. He says he expects the Federal Reserve to keep buying mortgage-backed bonds in an effort to keep interest rates low for the foreseeable future.

As the economy recovers, and as more of the shadow inventory gets cleared up, there will be more homes available and more credit available, thanks to the low interest rates. That means more Americans will be able to afford homes, and that's always a step in right direction when it comes to housing recovery!