Editor’s note: Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy.

RALEIGH, N.C. – The housing crunch just celebrated its one-year anniversary. It was a year ago that the housing market began to stumble, led by rising foreclosure rates and greater difficulty for many owners in making their home payments.

Now, one year later, by most measures matters are only worse. Foreclosure rates are higher, housing sales have dropped, and some owners are seeing their home values fall. More ominous, the housing pinch is beginning to impact households with good credit ratings.

Explanations abound about why the housing market suddenly turned sour. Fingers have been pointed at lenders, appraisers, builders and even homebuyers, who simply didn’t do their homework to understand the financial implications of buying a home. Everyone wants to find an obvious villain.

My explanation – and indeed, the explanation of many economists – is more subtle and less conspiratorial, and it goes like this. In the early part of this decade, in order to combat the 2001 recession and the aftermath of 9/11, the Federal Reserve pushed interest rates to a generation low and simultaneously flooded the economy with money and credit. The table was set for a huge borrowing spree.

Residential housing was a likely recipient for this borrowing for three reasons. First, after the dot-com bust, investors were still leery of stocks. Second, demographics supported a big investment in housing. There were growth spurts in potential first-time homebuyers in their 20s, trade-up homebuyers in their 40s, downsizing empty-nesters in their 50s, and retirees in their 60s – all primed to jump into residential real estate. And third, a tax law change in the late 1990s effectively eliminating income taxes on profits from the sale of a residence made housing a great investment.

So money and buyers flowed into residential housing. Because the market was hot, lending standards were in many cases reduced. The attitude was that any bad loans would be bailed out by the constantly rising value of homes. Indeed, in the mid-2000s, the average home was appreciating more than 12 percent annually. Of course, in some markets the appreciation rate was much greater. Residential housing was viewed as a can’t miss money maker by developers, lenders and buyers!

Then the Federal Reserve took the punch bowl away. Beginning in 2005, the Fed began to systematically and continuously raise interest rates and reduce credit availability. This shift in policy hurt the housing market in two ways. First, it reduced the number of people who could buy homes and, therefore, doused the flames that had been heating up housing prices.

Second, it increased the mortgage payments of those homebuyers who had used adjustable rate mortgages when rates were super-low. These owners became squeezed from two sides, from rising payments on one end and from slower increases in value and in some cases, decreases in value of their homes on the other end.

Consequently, the roaring housing market turned into a whimper, and even North Carolina has been impacted. Housing sales are down, housing prices are softer, and the construction industry has pulled back. Overall, the situation is not as bad in our state as in some others, but since the real estate-construction-finance industry accounts for 12 percent of all economic activity, a sneeze here can cause the entire economy to catch a cold.

So when will our sniffles end and brighter days return to real estate and residential housing? Unfortunately, most experts think the answer is "no time soon." The essential problem is that there are too many houses for sale compared to the number of buyers. One statistic suggests the current inventory of homes for sale will have to be cut in half before some normalcy returns to residential housing. And this will take time – probably a year or more.

The upside – for those who see the glass half full – is that bargains can be gotten by buyers. Homes that were out of reach a couple of years ago are now within the grasp of more buyers. The more buyers who perceive and take advantage of these bargains, the faster the housing market will turn around. And that, I expect you will decide, will be a plus for our overall economic health.