When will home prices recover? (© Robert Galbraith/Landov)

© Robert Galbraith /Landov

The lowest mortgage interest rates in almost 60 years, plus affordable homes in cities where buyers had been priced out for years, should be turning the housing market around. But the market also labors under heavy burdens, such as high unemployment, tight credit and a glut of foreclosures that are dragging down home prices.

Sales fell off a cliff after the homebuyer tax credit expired. And legal squabbling about the process used to repossess many homes postponed the sale of many foreclosed properties and struck yet another blow to confidence in the housing market.

For the four years beginning with the downturn in mid-2006, the median price of an existing home nationwide fell by 27%, or 7.7% annualized, according to Fiserv Case-Shiller, a home-price research firm. December's median home price was $168,800, a bit more than in 2003. (Bing: What's the median home price in your area?)

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Among the cities that Fiserv tracks, Merced, Calif., fared worst, with a 68% plunge in its median home price in the four years since the peak, followed closely by Modesto, Salinas and Stockton, Calif.; Cape Coral-Fort Myers, Fla.; and Detroit. Prices increased in just 12 cities, all in upstate New York, Tennessee or Pennsylvania. These cities missed the boom and plugged along at their usual, slow pace of appreciation.

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Stuck underwater
The home-price plunge has left 23% of the nation's 53.5 million borrowers underwater, meaning they owe more on their mortgage than their home is worth. Unless they can ante up the difference — an average of $75,000, according to CoreLogic, which analyzes mortgage data — they can't sell, and they can't move. Their choices? Stick it out; ask the lender for permission to sell for less than they owe, aka a short sale; or default.

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In Norwood, Mass., south of Boston, Al and Shannon Becker wish they could buy a bigger home, but they're underwater by about $50,000. But the couple have a plan.

They bought their 1910 farmhouse, with three bedrooms and two baths, for $389,000 in 2005. By 2006, the property appraised for $423,000, and the couple refinanced, taking cash out for home improvements. Now it's worth $350,000. Still, they can afford to move, and they could come up with the cash to pay off the mortgage.

Instead, they are paying an extra $500 a month on the second mortgage they took out when they purchased the house, anticipating the day when debt pay-down and home-price growth would converge.

Should they walk away? No.

"That would be un-American, and my parents would kill me," Al Becker says.

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The price gains that would put the Beckers and the millions of homeowners like them in the black have been tantalizingly out of reach, though glimmers of hope exist. Median home prices increased by 3.6% in the year that ended June 30. Many California cities saw double-digit increases. Prices increased by at least 5% in many cities in California's beleaguered Central Valley and Inland Empire, such as Riverside and San Bernardino, Calif., as well as in Phoenix; Washington, D.C.; Minneapolis and St. Paul, Minn.; and a few cities in Florida.

David Stiff, chief economist at Fiserv Case-Shiller, says those price increases were artificially propelled by the homebuyer tax credit and were not sustainable. The tax credit expired on April 30. By June, sales had begun to slide, and in July, they tanked.

In late summer, sales of existing homes began to climb again, but in the National Association of Realtors' most recent report, December's sales were still 43% below the same period in 2009. The lower the price tier, the greater the decline in sales, which reflected the pullback of first-time homebuyers.

Although this recovery may seem unendurably long, Stiff says that five to seven years is historically a "pretty standard time frame" for prices to stabilize after a large correction. But in the past, some regions suffered longer than others.

For example, Dallas home prices took 12 years to recover after they fell from their peak in mid-1986. This time around, however, the downturn hit more areas because the mortgage-credit bubble was so widespread.

The foreclosure factor
Now, short sales and foreclosures are the driving force behind continued price declines. Throughout 2010, they accounted for about one-third of home sales, with an average price discount of 26%, according to RealtyTrac. More of these sales are on the way, but estimates vary.

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Mark Zandi, Moody's Analytics' chief economist, says the foreclosure pipeline holds about 4 million loans that are or soon will be delinquent by 90 days or more. He says he thinks that half of those will end up for sale. He also says that delinquency rates have peaked and that foreclosures will peak this year.