Despite big earnings gains from the big public builders, overall confidence among the nation's home builders took a pause in January. An industry index measuring sentiment was unchanged after eight consecutive monthly gains. The index was heading toward the line between positive and negative sentiment, but appears to have stalled.

"Uncertainties stemming from last month's fiscal cliff negotiations contributed to the pause in builder confidence and continuing discussions among policymakers related to spending cuts and the future of the mortgage interest deduction could put a damper on housing demand in the coming months," noted Barry Rutenberg, chairman of the National Association of Home Builders in a release.

(Read More: Mortgage Applications Rebound in Latest Week)

For nine straight months, national home prices have been in the positive, and the gains are only getting larger. The latest reading for November shows a 7.4 percent jump from a year ago, according to CoreLogic. That includes sale prices of distressed properties, bank-owned homes and short sales. This is the largest year-over-year jump since 2006 when we were at the height of the housing boom.

"As we close out 2012 the pending index suggests prices will remain strong," wrote Mark Fleming, chief economist for CoreLogic in a release. "Given that the recently released Qualified Mortgage rules issued by the Consumer Financial Protection Bureau are not expected to significantly restrict credit availability relative to today, the gains made in 2012 will likely be sustained into 2013."

(Read More: Home Prices Could Surge Six Percent This Year: CoreLogic)

Even as the housing market accelerates on the road to recovery, there are still glaring reminders of the crash that was. Thousands of empty, foreclosed properties dot streets. A growing number of these homes, however, are not actually foreclosures. The borrowers still own them, whether they know it or not.

As federal regulators and banks argue over whether new lending standards will make mortgage credit too tight or too expensive, one important fact about the housing market goes largely overlooked: More than 20 million American homeowners own their homes outright. No mortgage.

This represents just about one third of all homeowners nationwide, according to a new report from Zillow, a real estate information, sales and mortgage website.

Demographics, home prices and geographical location all seem to play into "free-and-clear" home ownership, according to Zillow's survey.

Out of the nation's top 30 housing markets, Pittsburgh, Tampa, New York, Cleveland and Miami had the highest percentage of free-and-clear homeowners. A high number of all-cash, foreign buyers probably plays into New York and Miami. The other cities have relatively low home values, compared to the rest of the nation, making it easier for homeowners to either buy their homes outright or pay off their mortgages more quickly.

Washington, D.C., Atlanta, Las Vegas, Denver and Charlotte had the lowest percentage of homeowners with no mortgage. Las Vegas, hard hit by the housing crash, saw many of its homes go to foreclosure and those homes then go to all-cash investors. (Read More: Banks Pay Big for Robo-Signing…Again.)

Three years ago Aaron Edelheit was working out of his living room, buying foreclosed properties, and putting them up for rent. Today he is CEO of The American Home Real Estate Investment Trust, one of the first REITs investing only in single family rental homes.

"We think the foreclosure crisis has allowed a couple of firms such as ours to get size and scale to start institutionalizing a very large market," said Edelheit.

The cost of faking a foreclosure document continues to rise. Ten banks will now pay $8.5 billion to borrowers for so-called "robo-signing," a fraudulent practice uncovered two years ago that sent the mortgage market into yet another tail-spin.

Nearly four million borrowers will get either direct payments or mortgage assistance ranging anywhere from a few hundred dollars to over a hundred thousand dollars, according to federal regulators.

Home prices are now rising at their fastest pace since 2005. Housing bulls are running again, pointing to rising construction starts, rising home sales and falling mortgage delinquencies. Fears over the so-called "fiscal cliff" put a damper on some of that optimism briefly, but that quickly dissipated after the deal was finally struck. So why be cautious now?

"Low prevailing mortgage rates, the limited supply of existing homes for sale (either due to the few foreclosure completions or the number of underwater borrowers who cannot sell), and the anemic levels of new home construction are facilitating affordability and feeding demand," noted analysts at Fitch Ratings. "These factors are offsetting weak fundamentals that would otherwise hinder home price growth, such as high structural unemployment and lackluster wage growth."

(Read More: Why 'Fiscal Cliff' Deal Will Help the Housing Recovery.)

Fears of tax hikes in 2013 sent sales of high-end Manhattan properties soaring.

Total sales of both co-ops and condominiums jumped 40 percent in the fourth quarter of 2012 year from the same period in 2011, according to a new report from Brown Harris Stevens. The average co-op price of $1,285,426 was 12 percent higher than a year ago, while three-bedroom and larger co-ops saw a 34 percent price leap. (Read More: America's Most Expensive Homes 2012.)

"With the upcoming changes in tax laws, record low interest rates and the inventory of available apartments at 30 percent below where it was a year ago, the incredible activity in the fourth quarter was not surprising" said Hall. F. Willkie, president of Brown Harris Stevens Residential Sales.

The housing market is on firmer ground today, as two major tax provisions survived the "fiscal cliff." Congress did not touch the mortgage interest deduction, and it extended tax relief for one year on mortgage debt forgiveness.

"An extension of the tax break is positive for home values by reducing the number of foreclosures and helping more troubled borrowers stay in their homes," wrote Jaret Seiberg of Guggenheim Partners. "That means less supply on the market."

Under a law signed in 2007, debt relief on loan modifications, short sales, and foreclosures were no longer taxable; that break expired at the end of 2012. The fear was that if the tax break was not extended, home owners would not agree to short sales (when the home is sold for less than the value of the mortgage) because they would then face a tax bill. They would also not agree to principal reduction loan modifications, which have proven to be far more successful than other modifications that leave the principal balance as is.

Under the $25 billion mortgage servicing settlement, borrowers have received $6.3 billion in mortgage principal relief through September, according to the settlement's monitor, Joseph A. Smith, Jr. The average loan balance reduction, $150,000. Banks completed 13,351 principal reduction loan modifications in November alone, according to Amherst Securities Group, a 62 percent jump from September.

Short sales also surged toward the end of the year, thanks to streamlined procedures and a more aggressive stance by the big banks, again in part due to the mortgage servicing settlement. More than 98 thousand short sales were completed in the third quarter of 2012, according to RealtyTrac.

Home prices and home buyer confidence are rising in tandem, as the housing recovery appears to be gaining steam, even into the winter months.

A drop in sales of distressed properties are largely to thank for both. Just under 34 percent of homes sold in November were either foreclosures or short sales, according to a new report from Inside Mortgage Finance. That's the lowest level in three years, down from a record high of nearly 46 percent in 2011.

"Current homeowners are continuing to drive the recovery of the housing market," according to IMF's latest HousingPulse. "In November, current homeowners accounted for 46.3 percent of the total home purchase transactions tracked. This was the highest level ever recorded in the HousingPulse survey and was up from 44.8 percent a year earlier." (Read More: Housing's Repo Man Is Back)

Up to now the housing recovery had been fuelled by investors buying up thousands of distressed properties, the bulk of them in western states like Arizona, Nevada and California. This helped shrink supplies in those states and boost prices by double digits. While it may seem like the distress is quickly flying out of the market, that may not be the case just yet. (Read More: Best US Housing Markets for Buyers and Sellers)