The other channel of a potential economic recovery would be housing. This was the channel that got Paul Krugman so jazzed last week. I should note that the Federal Reserve’s economic projections show basically no difference from their last ones in June, and Bernanke said specifically that housing is “a piston that has not fired” in this recovery.

There has been a price increase, or at least a lack of further crumbling in prices, which has led to a decline in negative equity in the second quarter of 2012. I would call that pretty modest; however, we’re still at 10.8 million underwater homes, according to CoreLogic. And it’s hard to say anything definitively about housing statistics given what we know about their flaws. Still, the trend is down in what we would call a modest fashion.

We know the two reasons for what everyone is calling a housing recovery: shadow REO, where banks keep properties off the market, and the rapid purchase of other REO by investors, who flip them into rental properties. You can see this in the sharp uptick in rentals of single-family homes, and from anecdotal events like a California investment company buying 700 Florida foreclosures all at once. Both of these actions constrain supplies, and that puts upward pressure on prices. Large percentages of overall sales are going to investors, and this does not appear to be a sustainable scenario, especially when the investors wring out the value of the rental units and want to dump the properties.

As for the actions that would legitimately reset the housing market and provide a benefit for homeowners as well as investors, those look fleeting. The FHFA has already shot down a proposal to reduce principal. Freddie Mac will allow limited principal reduction through the Hardest Hit Fund in several states, but not at a level that will make a meaningful difference. The foreclosure fraud settlement is largely doing the job of increasing short sales, following the path of investor-heavy REO conversions to rentals. There was some heat around a proposal to use eminent domain to restructure mortgages, but now Congress wants to legislate that option away.

The housing market, then, is headed on a dangerous path. I’ll have more on this in the coming days, but if you think that an investor-heavy market of house-flippers, with little recourse for those underwater but to sit tight and hope, and a nation of absentee slumlords redlining neighborhoods is something healthy, well you’re in luck, because that’s what we’re getting.