Lets recap the potential path for housing and the economy based on news reported in March:
- Economy so-so
- Investors get risk averse
- Subprime defaults increase
- Mortgage underwriting guidelines tighten
- Weak housing market gets weaker as a result
- Housing related jobs decrease
- Economy weakens further, skirts with recession
- A few years of weak housing conditions remain
To expand on each point…
1. Economy so-so [FDIC – pdf] 
Pronounced weakness in the housing sector is being largely offset by continued strength in the corporate sector, commercial construction activity, and exports…Still, some negative trends have emerged for banks. They include a narrowing of net interest margins, particularly among larger institutions; increasing concentrations of traditionally riskier commercial real estate loans; and emerging signs of credit distress in subprime mortgage portfolios. Ultimately, it is local economic conditions that are the most important determinants of credit quality and earnings strength at the majority of banks and thrifts. In this issue of the FDIC Outlook, our regional analysts identify trends that are expected to affect banking in their areas during the remainder of 2007.
2. Investors get risk averse [Bloomberg] 
The concern over subprime lending and rising defaults is increasing the flight to safety. That is, investors are buying treasuries. Price goes up, yield goes down. Lower yields on a ten year have limited effect on most mortgage rates because the term is too short but still, it would probably help maintain a low rate environment.
“The biggest risk we can identify is from the spate of foreclosures in the subprime market increasing the inventory of unsold homes and weighing on home prices,” said Amitabh Arora, head of U.S. interest-rate strategy in New York at Lehman Brothers Inc. “We are much more cognizant of that than we used to be.”
“Just as the case often was back in college, when you have too much liquidity sloshing around for too long, people tend to do some foolish things,” Wachovia senior economist Mark Vitner wrote in a recent research note. “Apparently that includes loaning money to folks with spotty credit histories to purchase homes not only to live in but also to speculate on.”
Early February, the Federal Reserve reported a sharp increase in the number of banks tightening mortgage-lending standards. On Tuesday, Freddie Mac — whose main business is repackaging mortgages into mortgage-backed securities — said it was tightening standards on purchases of risky, subprime mortgages. On Friday, banking regulators proposed stricter mortgage guidance.
That could hurt the housing market by shrinking the pool of eligible buyers. In addition, many homeowners with high-risk loans whose rates will adjust upward in the next year or two won’t be able to refinance into loans with better terms. That could put some into foreclosure.
Housing-related job losses once again put a dent in February job growth, which saw an overall gain of 97,000 — down from a gain of 111,000 in January. Employment in housing-related industries fell by 11,000 in February, bringing to 176,000 the total number of jobs lost in the sector since at sector since April 2006, according to figures compiled by Moodys.com.
Alan Greenspan, who jolted investors by predicting a one-in-three chance of a recession this year, isn’t as bearish as the bond market, where the risk of a downturn is even money. The probability the U.S. economy will shrink for two quarters has risen to 50 percent, according to a model created when Greenspan ran the Board of Governors of the Federal Reserve System. The formula is based on differences in yields on Treasuries.
Celia Chen, director of housing economics for Moody’s Economy.com, says she thinks it will take until 2009 for prices nationally to reach the peaks hit in 2005. Take inflation into account, she said, and a full recovery could take more than 7 years.
I’d have to agree that its not simply a matter of time before the national housing market returns to 2004/2005 conditions. The housing boom was a period where all the stars were aligned and the universe was in sync. The combination of unusually low mortgage rates prompted by 9/11, loose or perhaps non-existent underwriting guidelines for mortgages, expansion of subprime lending, exotic mortgages, a solid non-inflationary economy, rising productivity, risk oblivious investors who had moved out of the stock market after the 2000-2001 period of volatility, shifting demographics that saw more immigration and a get rich quick mindset created the housing boom.
The news isn’t all bad, however. Modest growth in the housing sector would go a long way in keeping housing more affordable. I think Fannie Mae’s record of 69% home ownership reached last year, which has since slipped, is not going to be passed anytime soon.
On the bright side, March Madness  is nearly here and my son’s basketball team won our town’s 3rd grade basketball championship.