The unsustainable housing boom of 2003–2005 was powered by major deterioration of mortgage lending standards along with a massive increase in home buying by investors. The subsequent correction process has involved not only major downslides of home sales and housing production but also declining homeownership and rising inventories of vacant housing units. Vacancies have surged as investors have put unoccupied units back onto the markets, and rising mortgage foreclosures have added to inventories and detracted from homeownership at the same time.

Housing affordability measures are well off the lows of last year, but consumer attitudes toward home buying have not perked up appreciably. Furthermore, the overhang of vacant housing units on for-sale and for-rent markets is very heavy. And the real wild card in the housing supply-demand game in 2008 is the number of units that will come onto the markets due to mortgage foreclosures.

The U.S. homeownership rate has fallen by 1.6 percentage points since the record high in the second quarter of 2004, ­returning to its mid-2002 level. Indeed, the absolute number of homeowners fell ­significantly in 2007 (by 600,000), a rare event in U.S. history.

The striking slippage of homeownership last year reflects a subpar rate of overall household formations as well as a strong shift from homeowning to renting. This shift pushed the rentership rate to 32.3 percent by the end of last year, the highest it’s been in more than five years. Furthermore, the absolute number of renter households has risen systematically since mid-2004, particularly in 2007,following systematic declines during the previous nine years.

The falloff in the homeownership rate during recent years was due primarily to eroding affordability and tightening of mortgage lending conditions following the boom. But the abrupt downshift in both the homeownership rate and the absolute number of owners in 2007 also reflected a sharply rising wave of mortgage foreclosures.

The Census Bureau provides quarterly estimates of vacant year-round housing units for sale, including completed homes in the hands of builders and vacant homes in the existing housing stock. This measure gives a good sense of the true weight of the inventory overhang facing builders.

The Census Bureau reported a record 2.18 million vacant year-round housing units for sale in the fourth quarter of 2007, including a record 1.65 million single-family homes. (The rest are multifamily condo units and manufactured homes.) There’s also a record number of vacant year-round housing units for rent, including more than a million single-family units, and many of these eventually could be moved onto the for-sale market.

The persistent weakness of housing demand, the record overhang of vacant housing units, and the inevitable upswing in mortgage payment problems cry out for strong policy responses from Washington. The housing sector needs aggressive monetary stimulus from the Federal Reserve; aggressive efforts to restructure and refinance subprime ARMs; larger financing roles for FHA, Fannie Mae, Freddie Mac, and state housing ­finance agencies; and tax credits for home buyers.