Significant home price declines have had surprisingly little impact on affordability, according to researchers at Harvard University’s Joint Center for Housing Studies (JCHS), which released its annual “State of the Nation’s Housing” report yesterday.

At the same time house prices have fallen, “mortgage interest-rate resets and rising energy costs have saddled even more households with high housing costs,” notes the report. Many households have also only added to their debt burden by tapping into their home equity. And foreclosures are driving more Americans back into the rental housing market, where their newly damaged credit disqualifies them from many rental opportunities.

Overall, the current down cycle is “shaping up to be the worst in 50 years,” JCHS researchers assert, with production and sales cutbacks that rival the historic 1978-1982 downturn, but with even steeper price drops. Single-family home prices generally have fallen by 12 percent in nominal terms, and 18 percent in inflation-adjusted terms, since prices peaked in October 2005.

As a result, housing’s “wealth effect” effect has evolved into a drag on consumer spending. “The switch from home price appreciation to depreciation, plus the slowdown in home equity withdrawals, trimmed about one-half of a percentage point from real consumer spending and more than one-third of a percentage point from total economic growth” in 2007, the report says.

Unfortunately, the current cycle “may have a long way to go,” the report warns. Interest rates are still relatively high, a weak housing market is sidelining potential buyers who need to sell their current homes before they can buy new ones, and foreclosures are at the highest level since recordkeeping began in 1974. “The excess inventory must be worked off before the demand for new homes rebounds,” says the report.

JCHS researchers do believe immigration and new household formation will support an eventual return to robust levels of new construction. “The current housing cycle in and of itself is unlikely to diminish the long-run growth of households,” the report says.

The timing and strength of the rebound will depend on the country’s broader economic situation. “If the economy slips into a severe recession, the prolonged contraction could drive down the sustainable level of housing demand … but in the case of a mild downturn, which most economists expect, the fundamentals of demand are likely to drive a strong rebound in housing once prices bottom out and the economy begins to recover,” according to the report.

A rebound in the single-family home construction industry, of course, would create new jobs as well as housing. But the government—local, state, and federal—will need to assist. The 2008 “State of the Nation’s Housing” notes a handful of state programs intended to address foreclosure, such as Ohio’s effort to partner with loan services and connect borrowers with counseling and loan workout programs. It also mentions federal initiatives in support of mortgage refinancing. Both houses of Congress have also been working on a housing rescue bill, despite veto threats from President George W. Bush.

But events could easily outstrip the effectiveness of current efforts. “The wave of foreclosures will take months to process and the number of homes entering foreclosure could continue to rise even if the volume of loans with [interest-rate] resets drops from last year’s level,” according to the report. And, as report author Eric Belsky observed in an email to BUILDER, “[t]he proposals to deal with loans in trouble have yet to get enacted, and voluntary efforts have had limited success.”

Ted Cushman is a contributing editor to BUILDER magazine.