Today's housing market: 'Not for the faint of heart'

People don't often go house hunting when the mercury dips below zero. They also don't buy houses they can't afford. It should, therefore, come as little surprise that as the weather warmed and gains in home prices eased, home buyers came back to the market.

Suddenly the outlook is more positive. But perspective is a healthy tool, especially when we saw an 18 percent monthly jump in sales of newly built homes in May.

"To smooth out the winter and the spring so far, the six-month new home sales average (per month from December through May) is 445,000 homes vs. 445,000 in November and 442,000 in December," calculated Peter Boockvar, chief market analyst at The Lindsey Group.

Scott Mlyn | CNBC

He said the last six months gets the pace of sales close to pre-winter numbers, but nowhere near where they should be for a full recovery. "The recent previous (monthly) peak of sales in 2013 was 459,000 (in June), but we remain still 64 percent below the peak seen in 2005," Boockvar said.

The builders are doing better, but they're not exactly back. Single family housing starts are still meandering in near record-low territory. Supplies of new homes for sale are meager, and the builders are targeting high-end buyers, not the entry-level, first-time buyers who are sorely needed to complete this recovery. In fact, the biggest increase in sales came in the $400,000 to $499,000 price range, according to the U.S. Census. That is twice the median price of a newly built home.

Read MoreApartments fill as rental demand keeps on surging

Although builders are swimming in higher prices, the rest of the market is seeing prices ease. The widely watched S&P Case Shiller home price index showed prices in the nation's top 20 markets up just 10.8 percent from a year ago in April, after showing over 12 percent annual gains in March. This index is a three-month running average, so those prices really reflect sale values in January as well. Other measures have shown much smaller annual price gains in May.

"Prices are more or less okay where they are. They went up way too high in 2006, and they came down about 50 percent. Now they're going up, they look about right. I hope people don't get so worked up about them," said Robert Shiller on CNBC's "Squawk on the Street."

Others argue prices are already too high, with talk already of at least local "bubbles" and weaker affordability nationwide.

"Monthly payments to the end-user buying a house with rates at 4 percent right now are more expensive than they were in 2006 using an interest only loan for five to 10 years," said Mark Hanson, a California analyst interviewed today by CNBC's Rick Santelli.

Read MoreHousing starts surge, yes, but mostly for apartments

So where exactly is the housing recovery now? What is driving it, and what is standing in its way?

"The reality is that the market is moving from one defined by distortions, including high negative equity and constricted inventory, to one defined by fundamentals like household formation rates, jobs and income growth," noted Stan Humphries, chief economist at Zillow. "Unfortunately, some of these fundamentals are still fairly weak. This is a multi-year process that we are far from done with. This ride is not for the faint of heart, but we are slowly getting back to normal."

The good news though, is that employment is improving, and that should slowly add to housing activity, though much of it initially on the rental side.

Read MoreNatural disasters don't dissuade home buyers

"Now people will not only be more confident about buying homes, but there will, for the first time since the downturn began, be more potential new home buyers than we had before the downturn began. You have to have a job if you want to get a mortgage," said Brad Hunter, chief economist with Metrostudy. "Household formations are running very low, but they will rise soon."

By CNBC's Diana Olick

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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