Four years ago, the housing market collapsed as the artificial bubble in prices and equity popped.  The disaster infected the financial sector, thanks to the aggressive policy supported by two administrations and Congress to spread the risk for subprime and other dicey lending through Fannie Mae and Freddie Mac securities, nearly destroying the Western economy — and still destroying massive amounts of assumed wealth.  The collapse left a lot of homeowners so underwater on their mortgages and unable to make payments that massive foreclosures resulted, driving down middle-class wealth in a firestorm unparalleled in decades.

For the next four years, government interventions attempted to stabilize housing prices so that middle-class homeowners could return to rational economic planning and rekindle consumer demand.  Those efforts failed, though, and the last two years have mainly seen a laissez-faire approach that encouraged markets to find a rational bottom.  According to one analysis, we have finally reached that point:

U.S. home values have risen four consecutive months, Zillow.com said on Tuesday, a trend that led the housing website to declare that the market has turned the corner from its five-year slump.

“After four months with rising home values and increasingly positive forecast data, it seems clear that the country has hit a bottom in home values,” said Stan Humphries, chief economist at Seattle-based Zillow, which measures home values. “The housing recovery is holding together despite lower-than-expected job growth, indicating that it has some organic strength of its own.”

The home value index in the second quarter rose on an annual basis for the first time since 2007, increasing 0.2 percent compared with last year’s second quarter to $149,300, according to Zillow. Going back to March, values have now risen four months in a row.

Zillow’s index is a measure of the value of single-family residences, condominiums and units in housing cooperatives, regardless of whether those homes sold within a given period. The index is calculated using Zillow’s method for estimating current home values in a given geographic area on a given day. The index is based on data from more than 80 million homes, Zillow says.

Not so fast, says CNBC’s Diana Olick.  The flattening of the downward trend is a positive step, but it’s mainly true for the markets who got hardest hit:

Zillow’s report, which compares prices of homes sold in the same neighborhood, also showed a stronger 2.1 percent gain quarter to quarter, which is the biggest uptick since 2005. The biggest price gains, however, are in the markets that saw the biggest price drops during the latest housing crash. Phoenix, for example, saw a 12 percent annual price gain on the Zillow index.

That has other analysts claiming that the overall surge in national prices is due to price bubbles in certain markets.

“Strong demand, particularly in areas of California, Arizona and Nevada, are pushing up home prices very quickly in the short-term. And because many of the home purchases in these areas are cash transactions, there appears to be less braking of prices by our current appraisal system than seen in other parts of the country,” noted Thomas Popik, research director for Campbell Surveys and chief analyst for HousingPulse. “The trend raises the distinct possibility of housing price bubbles emerging in some of these hot housing markets.” …

While home prices on the Zillow index are improving most in formerly distressed markets, like Miami, Orlando and much of California, they are still dropping in other non-distressed markets, like St. Louis (down 4 percent annually) Chicago (down 5.8 percent annually) and Philadelphia (down 3.5 percent annually).

“Those people looking at current results and calling a bottom are being dangerously short-sighted,” said Michael Feder, CEO of Radar Logic, a real estate data and analytics company. “Not only are the immediate signs inconclusive, but the broad dynamics are still quite scary. We think housing is still a short.”

This is still positive news.  We needed the markets that got hammered hardest in the collapse to recover.  However, their drop was so sharp that the recent rise could be one of two results: either the sharp drop took values too low for the short term and this is a return to a rational bottom, or it prompted so much interest from investors that it created another irrational mini-bubble.  While that would not be good news in the short term, it’s probably a result we could expect as the market searches for that rational bottom in the long term.

Thanks to the resistance to keep intervening in a valuation crisis caused by excessive intervention, we are much closer to finding a rational valuation than we were in 2009 and 2010, when Barack Obama kept insisting on short-term credits to spark demand at irrational valuations.  Not only did those gimmicks fail to create demand (it simply shifted future demand to the present) and fail to create qualified homebuyers (instead subsidizing already-qualified homebuyers with taxpayer dollars), it ended up saddling people who bought non-foreclosure properties in the last four years with overpriced homes.  That will damage their long-term equity positions and wealth accumulation.

Whether or not we’ve reached the bottom, we’re at least approaching it by now.  The next step is to generate more demand through increasing the number of qualified homebuyers in the market as foreclosure inventories disappear.  More government interventions won’t work, and they’d likely create the same kind of irrational bubble that ended up nearly destroying the Western economies.  The only way to grow demand rationally is to generate enough new jobs to put the sidelined back to work, in order to attain the financial position necessary to buy.  Unfortunately, this administration hasn’t bothered to address the kind of regulatory and fiscal reforms that would fire up the engines of job creation, and these days seems more interested in arguing that small businesses are parasitical rather than productive.

Update: New numbers from the manufacturing sector don’t promise much hope in this regard, either:

Manufacturing this month expanded at its slowest pace since late 2010, hobbled by weak overseas demand for American goods, though a rise in domestic orders helped cushion the blow.

Financial information firm Markit said on Tuesday its U.S. “flash” manufacturing Purchasing Managers Index for July fell to 51.8 from 52.5 in June. July marked the fourth consecutive month of slower growth and the sector’s weakest showing since December, 2010.

The index remained above 50, indicating factory activity continued to expand, only less rapidly.

New orders for exports fell outright for the second straight month, the first back-to-back decline in nearly three years, Markit said, as recession in Europe dented demand.

We need to unshackle capital to get it invested in the private sector, and the only way to do that is to back off on tax increases and eliminate the massive regulatory uncertainties introduced by ObamaCare, Dodd-Frank, and the EPA’s war on coal.