The housing crunch recently marked its one-year anniversary. It was a year ago that the housing market began to stumble. The downturn was led by rising foreclosure rates and greater difficulty for many owners in making home payments. Now, by most measures, matters are worse. Foreclosure rates are higher, housing sales have dropped, and home values are continuing to fall. More ominous, the housing pinch is beginning to affect households that have good credit ratings.

Explanations abound about why the housing market suddenly turned sour. Fingers have been pointed at lenders, appraisers, builders, and even homebuyers who didn’t do their homework to understand the financial implications of buying a home. Everyone wants to find an obvious villain.

My explanation, and the explanation of many economists, is more subtle and less conspiratorial, and it goes like this: In the early part of this decade, in order to combat the 2001 recession and the aftermath of Sept. 11, the Federal Reserve pushed interest rates to a generational low and simultaneously flooded the economy with money and credit. The table was set for a huge borrowing spree.

Residential housing was a likely recipient of this borrowing for three reasons. First, after the dot-com bust, investors were still leery of stocks. Second, demographics supported a big investment in housing. There were growth spurts in potential first-time homebuyers in their 20s, trade-up home buyers in their 40s, downsizing empty-nesters in their 50s, and retirees in their 60s — all primed to jump into residential real estate. And third, a tax law change in the late 1990s effectively eliminating income taxes on profits from the sale of a residence made housing a great investment.

So money and buyers flowed into residential housing. Because the market was “hot,” lending standards were in many cases reduced. The attitude was that any bad loans would be bailed out by the constantly rising value of homes. Indeed, in the mid-2000s, the average home was appreciating more than 12 percent annually. Of course, in some markets the appreciation rate was much greater. Residential housing was viewed as a “can’t miss” money maker by developers, lenders, and buyers.

Then the Federal Reserve took the punch bowl away. Beginning in 2005, the Fed began systematically and continuously to raise interest rates and reduce credit availability. This shift in policy hurt the housing market in two ways. First, it reduced the number of people who could buy homes and therefore doused the flames that had been heating up housing prices.

Second, it increased mortgage payments of homebuyers who had used adjustable-rate mortgages when rates were very low. These owners became squeezed from two sides, from rising payments on one end and from slower increases in value — and in some cases, decreases in value — of their homes on the other end.

Consequently, the roaring housing market turned into a whimper, and even North Carolina has been affected. Housing sales are down, housing prices are softer, and the construction industry has pulled back. Overall, the situation is not as bad in North Carolina as in some other states, but since the real estate/construction/finance industry accounts for 12 percent of all economic activity, a sneeze here could cause the entire economy to catch a cold.

So when will our sniffles end and brighter days return to real estate and residential housing? Unfortunately, most experts think the answer is “no time soon.” The essential problem is that there are too many houses for sale compared to the number of buyers. One statistic suggests the current inventory of homes for sale will have to be cut in half before some normalcy returns to residential housing. This will take time — probably a year or more.

There are many lessons to be learned from the housing crunch, but certainly an important one is: watch the Federal Reserve. Like no other institution, it has the buttons to push that can move the economy — both up and down. With the Fed today in “stimulate” mode, many are already asking: Where will the next big investment bubble be? Stay tuned.

Dr. Michael L. Walden is a William Neal Reynolds distinguished professor at North Carolina State University.