Regardless of some of the positive news about the economy in recent months, one stark fact underscores the fragility of the recovery: Home prices have refused to rebound from their huge losses. And with the housing industry facing an even bigger slide than it suffered during the Great Depression, a change in long-term sentiment could spell even more trouble for homeowners trying to sell and for companies that rely on a thriving housing market.

The big question is whether housing will ever return to the go-go times of the boom years. The answer depends on whether a new reining-in of expectations of home-price appreciation proves to be overly pessimistic or merely realistic.

Goodbye, gains
A recent column by economics professor and housing expert Robert Shiller discussed what could be a sea change in perception about the housing market. Over time, Shiller has done several surveys of home buyers and their expectations about future returns for home prices. Back in 2005, after a decade of double-digit annual gains, buyers expected an average annual return of 7% going forward, with a substantial portion expecting gains of 15% or more during the ensuing 10 years.

Now as we all know, home prices have dropped significantly since 2005 -- by about a third nationally from their boom peaks, and by even more in some markets. So when Shiller did another survey earlier this year, he found that buyers were far less enthusiastic, expecting only 3% annual returns on average. Of course, from Shiller's perspective, even that assessment may be too optimistic: He expects that home prices could drop another 10% to 25% from current low levels.

The deflationary spiral
In many ways, what's happening in the housing market is exactly what policymakers such as Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner have feared for the economy as a whole. With falling prices, potential home buyers get rewarded for every month they wait before buying a home. That constant reward has put homebuilders under continuing pressure, as Beazer Homes (NYSE: BZH), Hovnanian Enterprises (NYSE: HOV), and Standard Pacific (NYSE: SPF) have all seen double-digit-percentage drops in revenue over the past year. Even higher-end homebuilders such as Toll Brothers (NYSE: TOL) haven't enjoyed the success that luxury-shopping retailers have seen.

At the same time, government attempts to kick-start the industry have largely failed. Home-buyer tax credits served largely to accelerate existing demand rather than create new buying. Attempts to encourage banks to modify onerous mortgages haven't worked, either, as the Treasury recently found Wells Fargo (NYSE: WFC), Bank of America (NYSE: BAC), and JPMorgan Chase (NYSE: JPM) to need "substantial improvement" in how they deal with borrowers under the federal government's Home Affordable Modification Program.

One encouraging factor
Amid all this doom and gloom is one change that's positive: The way people refinance their mortgages has changed. Rather than treating a home as an ATM, the majority of borrowers who refinance their mortgages either keep their balances the same or pay them down with extra cash. That suggests that people are getting their finances in order before overextending themselves with additional debt -- even with low interest rates that might otherwise allow them to take on larger mortgages without inflating monthly payments beyond reach.

Unfortunately, we still need solutions to several structural problems in the housing market. Fannie Mae and Freddie Mac have mostly disappeared from their shareholders' perspective, but the mortgage market still relies on them for liquidity and loan availability. Large portfolios of bank-owned property still overhang the market in many areas. And until overall economic conditions create confidence among the general public, fewer people are going to be willing to take on the six-figure obligation of owning a home.

At some point, prices will fall so low that buyers will have a huge opportunity that they can't afford to pass up. That opportunity may not be here yet, but it's certainly a lot closer than it was a few years ago. In the meantime, if you're in the market to buy a home, you've never had a better selection at attractive prices -- so take advantage of the favorable market without facing the pressure of having to pull the trigger right away.

Learn more about buying a home or getting the best financing you can find in the Fool's Home Center.

Fool contributor Dan Caplinger knows that home is where the heart is. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of JPMorgan Chase, Bank of America, and Wells Fargo; has opened a short position on Bank of America; and has created a ratio put spread on Wells Fargo. Motley Fool newsletter services have recommended shorting Standard Pacific. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy puts a roof over your head.