After all, it was deep-rooted problems in its housing market and the fancy investment structures Wall Street created on top of it which caused the great global financial crisis (GFC).

The answer has a fairly large bearing on the extent of the New Zealand economy’s recovery and therefore on how much our housing market can recover.

Housing and construction and related activity such as sales of major appliances, furniture and carpets, employment of tradespeople and services such as gardening are among the fundamental drivers of any economy.

Unfortunately, the news coming out of the US housing market is dire.

Even after all the pain already endured, RealtyTrac, the online marketplace for foreclosure properties, is predicting 2011 will see a new record for foreclosures with 1.2 million homes repossessed on top of the million lost in 2010. RealtyTrac says about one-third of all US house sales currently are foreclosures.

Between mid-2006 and

October 2010, the Standard & Poor’s/Case-Shiller composite index of house prices in 20 metropolitan areas, including New York, Washington, Los Angeles, Miami and Seattle, dropped nearly 30%.

Many economists expect home prices to drop another 5 percent to 10 percent in the next six months before stabilizing, according to Associated Press.

Some are expecting even worse: the Federal Reserve Bank of Dallas reckons US house prices are still more than 20% above their long-term mean.

Despite this sorry tale, Federal Reserve chairman Ben Bernake is still expecting the US economy will grow between 3% and 4% this year.

New Zealand’s economists are also expecting growth will be positive, albeit with a slow grinding recovery. However, they keep pushing out when they expect Reserve Bank governor Alan Bollard will resume raising rates – Brendan O’Donovan, chief economist at Westpac now says September may be too soon.

There are plenty of instances of economies managing to grow when their house prices are falling, O’Donovan says. Falling US house prices is a major reason for the Fed to continue printing money (known as QE, or quantative easing, ll).

O’Donovan says the US printing money seems to be having more effect outside the US with emerging markets such as China, India and Brazil growing very strongly.

“It’s still a world full of dichotomies” with plenty of negatives such as sovereign debt problems in Europe and massive amounts of municipal and state debt throughout the US, O’Donovan says.

But at the same time, US industrial production is rising strongly and many commodity prices have been pushed very high, reflecting strong demand, he says.

Chris Green at First NZ Capital says a number of major investment houses, including his own’s international partner Credit Suisse, have been revising upwards their views on the US economy.

Concensus forecasts in January were for 3.2% growth in 2011, up from 2.7% in December and 2.4% in November. Credit Suisse is forecasting 3.8% fro 2011, up from 2.9% previously. While it acknowledges the continuing prices, it regards house prices as relatively cheap. “Housing affordability, which takes into account prices, interest rates, and income, has never been higher,” it said in a report last week.

Tony Alexander, chief economist at Bank of New Zealand, is of a similar view. “It’s still very much up in the air this year as to how strong the recovery will be,” Alexander says. But the prospect is still for growth.