There was a lot of continuing talk last week about signs of a coming "bottoming out" and eventual "recovery" in housing, but a risk to that forecast is that temporary government aid may be responsible for it.

"Both activity and price indicators in the housing market have been running noticeably above their recession lows in recent months, suggesting that a bottom has been forming," Deutsche Bank Securities researchers noted in their U.S. Housing Outlook report last Thursday. "However, much of the recent strength in sales and prices appears to have been driven by the homebuyer tax credit." Or as glam metal band Cinderella put it back in the '80s, it could be that you "Don't Know What You've Got (Till It's Gone)."

The Deutsche Bank researchers said their best guess is that "the underlying demand and especially supply fundamentals in the housing market" are "still soft enough to imply that a sustained recovery in both homebuilding and home prices is unlikely for at least another year." They believe "affordability will take a hit as interest rates move higher in the months and quarters ahead, but not enough to derail the expansion."

Some market participants are nevertheless quite concerned about a coming rise in interest rates. But with today's tight underwriting and several months of pretty low 30-year rates behind us, it has been unclear how much effect the long-term rates held low by the Federal Reserve's temporary MBS purchases really have been having on consumers' housing appetite. Whether this means removing those low rates will be equally underwhelming, or show that they actually have been propping up the housing market to a greater extent than we thought, remains to be seen.

"Most estimates suggest that the sensitivity of house prices to interest rates is not terribly high," according to a separate Deutsche Bank report by chief economist Joshua Feinman. Referencing some International Monetary Fund research, this report looks at a somewhat related question involving how much of an effect federal intervention has had when it comes to traditional short-term interest rate policy, as well as whether asset price bubbles should be considered in setting that policy. This may shed some light on the extent of certain types of federal intervention's influence on housing, albeit in a different context.

This report's answer to the question in its title, Did Monetary Policy Cause the Housing Bubble? seems to be "probably not." If this is true, perhaps there's some hope that it may not stop the market from coming out of one either.

"Many (though not all) countries experienced housing bubbles. And many pursued accommodative monetary policies," Feinman noted in the report. "If monetary policy was the primary cause of these housing booms, we'd expect to find that countries with the most accommodative monetary policies had the most intense housing booms. But that's not what we find."

"The broader question of what role asset prices should play in the setting of monetary policy is a tougher one," he said.

Should federal officials look to asset prices in considering interest rate policy? The report suggests there may be reason to when "lax underwriting" is the concern. So perhaps, when tight underwriting is the concern they should as well.

But have prices fallen enough yet? According to the separate Housing Outlook report, "regional data on home prices relative to rent levels indicate ... many regions have seen substantial adjustment back to precrisis levels." However, "in some regions, especially those where housing bubbles were more pronounced, more adjustment may be needed."

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