The stunning housing downswing that followed the unsustainable boom of 2003 to 2005 got an extra, and unanticipated, push from waves of turmoil in the mortgage finance system during 2007. Fortunately, a good bit of the necessary correction process in housing and mortgage markets is now under our belts.

Housing market imbalances generated during the boom were corrected to some degree during the 2006-to-2007 housing downswing. To address flagging demand, many sellers of new and existing homes cut prices and offered a variety of non-price sales incentives. At the same time, median household income grew at a healthy rate ? about 5% per year.

As a result, house price-to-income ratios have fallen in most places and standard measures of affordability (incorporating prime mortgage market conditions) recently have been on the rise in all major regions of the country.

On the supply side of housing markets, builders have cut back dramatically on production of new housing units, dropping single-family starts by more than 50% from the cyclical high two years ago. These cutbacks have led to modest reductions in unsold inventories of new homes, and inventories also are off recent highs in the existing-home market.

In mortgage markets, the unsound practices that helped fuel the boom generally were weeded out during 2007, and we’re not looking for further tightening of mortgage lending conditions in 2008. Indeed, quality spreads within the market may very well narrow to some degree