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hen pundits look back at 2013, the numbers show the U.S. economy in clear recovery from the darkest days of the 2008 crash. The stock market was a bull market by the end of the year: The Dow Jones Industrial Average gained 26.5 percent; the NASDAQ rocketed 38 percent.

Unemployment finally nosed under 7 percent, and consumer borrowing resumed on economy-boosting non-revolving debt like auto and student loans.

Housing, however, remains cloudy. While existing home sales had their best year since 2006 and federal estimates noted a rebound in homeowners’ equity to 2003 levels, the 1-percentage-point rise in mortgage rates from May to September helped slow construction starts to just below 1 million for the year, well below the long-term annual average of 1.5 million.

Those numbers just scratch the surface of the challenge, according to Janice C. Eberly, the James R. and Helen D. Russell Professor of Finance.

“Policy is difficult to implement in such a dynamic situation, as it is very hard to pull on individual threads; there’s so much change still playing out. You’re worried about potentially making the environment worse,” says Eberly, who from 2011 to spring 2013 served as assistant secretary for economic policy at the U.S. Treasury.

Housing, she says, is still “a nest of issues.”

Housing’s regulatory foundations

What’s in that nest? According to Kellogg academics and alumni, it’s an unprecedented mix of still-nervous economic signals, uneven regional recovery, permanent changes in current and potential homeowner attitudes, and a borrowing and regulatory scenario that’s largely unrecognizable from the one that existed before 2008.

“It’s hard to gauge how far we’ve come when we don’t know precisely where we’re going,” says Matt Feldman ’86, president and CEO of the Federal Home Loan Bank of Chicago. “What does the general population of the United States consider housing to be? It’s an existential question. Housing went from a form of domicile to being a form of domicile and a way to build equity — a major component of savings and retirement. So what happens when you end up with these factors and add the most massive housing correction I’ve seen in my lifetime?”

In that search for clarity, experts will be watching the early actions of new Federal Reserve Chairwoman Janet Yellen, who was ahead of her predecessor Ben Bernanke in raising concerns about the securitization-led housing bubble. According to an early January story in the National Journal, Yellen had labeled the failing housing sector the “600-pound gorilla in the room” at the Fed’s June 2007 meeting.

Experts will also be watching legislative progress to sustain or replace government-controlled Fannie Mae and Freddie Mac as primary providers of a secondary market for home mortgages. Both organizations teetered on the brink of collapse during the subprime mortgage crisis and were rescued by taxpayers in September 2008 to the tune of roughly $187 billion. As of earlier this year, both have paid more in dividends than they received in bailout funds.

“I believe the housing bubble and bust has demonstrated to most people in the public and private sector that there’s an essential role government must play in the U.S. housing market,” says Feldman. “How the government plays that role, how it steps in and what controls will be in place remain undecided. But government does have an important role to play.”

Building policy going forward

Researchers and policymakers will have plenty of ground to cover in an effort to prevent the next crisis. The central question: Did the government place too much emphasis on saving the banking system at the expense of quicker help to current and prospective homeowners?

Craig Furfine, clinical professor of finance, specializes in the commercial real estate industry, but notes that he and his students have had plenty to discuss with the housing crisis. “It’s important to realize that policymakers tend to make the more conservative choice,” says Furfine. “Rather than risk the failure of 2,000 to 3,000 banks heavily exposed to real estate loans, policymakers gave them a way to work out their problem loans over time.” The problem, says Furfine, is that “progress was very slow” and it’s only been “in the last year where we’ve seen substantial resolution of real estate loans in distress.”

In short, says Furfine, policymakers emphasized stabilizing the financial system, which may have had the adverse effect of delaying the help needed by individual borrowers. Those borrowers may have faced a range of problems that prevented them from getting or refinancing loans at lower costs. It remains difficult to evaluate whether policymaker choices were optimal because “we don’t know how things would have been if we followed a different path,” says Furfine.

Financing models for the future

Right now, Eberly is working on “what types of solutions are most effective at stimulating the macro economy when the housing market is declining.” Eberly points out that a particularly interesting area of research right now is determining “what kind of loan interventions are most effective at keeping people in their homes” so smarter, better-functioning models can be implemented in the future.

Biniam Gebre ’03, general deputy assistant secretary at the U.S. Department of Housing and Urban Development, agrees that banks needed proper time to stabilize their balance sheets during the crisis and that federal mortgage aid programs like the Home Affordable Modification Program and Home Affordable Refinance Program have had an impact. “We shouldn’t underestimate the power of those programs,” says Gebre.

He added, however, that better solutions could have been found to address negative equity in some of the hardest-hit areas in the country. “Thirty percent of the borrowers in Nevada are still under water,” Gebre notes. But he notes that stabilizing the banking system as a whole was the greater priority at the time of the initial crisis. “We couldn’t run the risk of crashing the banking system at the time. The banks needed time to absorb the information from the crisis in order to properly stabilize their balance sheets,” says Gebre, a former principal at McKinsey & Co.

Gebre, who co-founded the McKinsey Center for Government, McKinsey’s global hub for research, collaboration and innovation in government performance, points out that improvements in the housing market will simply come from an economy that’s working better. “We’re in considerably better shape than we were two to three years ago,” says Gebre.

The cultural factor

Feldman wonders about the brave new world ahead for home ownership. He wonders who the next generation of homeowners will be and what will happen to those who may never have that option again.

“People’s perceptions have been reset. You have a large portion of the population for whom this crisis will be a seminal event in their lives. And we’ve gone from a society where homeownership was ‘The American Dream,’ and now we’re seeing that not everyone should own a home,” says Feldman.

He hopes the housing crisis will spark a much broader discussion. “We’re just talking about home finance. We’re still not dealing with the portion of the population that will have less access to home ownership because they cannot afford to own a home or simply prefer to not take the risk of home ownership. How do we provide them with accessible, affordable housing that is of quality and not just a place to stay? That’s been inadequately considered to date.”