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The Real Key to the Recovery

Lawrence Summers, former director of the National Economic Council, recently said, "The central irony of a financial crisis is that while it is caused by too much confidence, borrowing, lending and spending-it is resolved only by increases in confidence, borrowing, lending and spending."

Unfortunately, the most critical sector that could jumpstart GDP growth is stagnant. Housing.

Of all of the reports on the weakening of the recovery in recent weeks, none is as critical and psychologically damaging to Americans as the revelation that this housing crisis is worse than the Great Depression-and still deteriorating.

By the start of the year, average home prices had fallen 33% since the market began its collapse in 2007, according to Case-Shiller. This surpasses the 31% decline during the Depression.

In the first quarter, housing prices declined by another 1.9%, causing Case-Shiller to announce that the housing market is in a double-dip.

The housing sector isn't expected to improve anytime soon. Banks are in a new push to unload foreclosed properties, hurting valuations in even the healthiest housing markets. Four out of five mortgages now require a 20% down payment, and banks continue to tighten their credit history requirements. Added to this is the estimate that 23% of homeowners have mortgages higher than their home's value, which means they cannot leave or could possibly default.

Even when a buyer puts a solid bid on a home, a bank appraiser often comes back with a lower figure that throws the sale off.

Paul Dales, a senior economist at Capital Economics, predicts that housing prices still have farther to fall.

"The sharp fall in house prices in the first quarter provided further confirmation that this housing crash has been larger and faster than the one during the Great Depression," Dales wrote in a recent research note to clients. "The only comfort is that towards the end of the first quarter, prices started to fall at a more modest rate. Nonetheless, prices are likely to fall by a further 3% this year, resulting in a 5% drop over the year as a whole." If this comes true, then by the end of 2011, housing prices will have fallen 38%.

When housing begins to stabilize is when Americans will regain their appetite for investing, spending and hiring, and the economic rebound will actually gain steam. MME