The housing market continues to grope towards some sort of rational valuation, and its search for the bottom has it reaching “depression territory,” CNBC reported yesterday.  The overall economy has remained mired in a recessionary environment, with some hints that hiring might pick up a little in 2011 — but if a real recovery does start, it won’t include the housing market, at least not initially:

Things were bad but the broader economy never reached Depression territory. The housing market, on the other hand, just crossed that threshold.

Home values have fallen 26 percent since their peak in June 2006, worse than the 25.9-percent decline seen during the Depression years between 1928 and 1933, Zillow reported.

November marked the 53^rd consecutive month (4 ½ years) that home values have fallen.

What’s worse, it’s not over yet: Home values are expected to continue to slide as inventories pile up, and likely won’t recover until the job market improves.

Cindy Perman notes with some amusement that Zillow also has devalued the White House, from $335 million at the housing boom’s peak to just $251 million today.  That’s a 25% drop in asset value, which may be a typical drop over the last three years in the US.

Of course, the specific problem that created the fall was an overvaluation thanks to a bubble created by government intervention, which is why calling it “depression territory” is probably somewhat misleading.  Housing values fell in the Depression not because those values were artificially inflated to begin with, but because of the massive deflation that occurred in the Great Depression across the entire economy.  That doesn’t mean that the loss of value hurts any less, but those who bought for the long term will see those values eventually rise again.  Those who bought before the bubble mostly still have equity at the current value as well.

The correction to irrational valuation needed to occur in order to build stability back into the housing markets.  It wouldn’t have taken 53 months to take place had Congress not fought this painful but necessary process with expensive interventions intended to prop up unsupportable valuation.  Had the government also worked to reduce regulatory and tax burdens to investment rather than increase both over the last two years, we may have solved the rest of the housing market’s woes through increased job creation, as unemployment poses the greatest risk for further deflation in real estate.