North American housing markets present an interesting contrast between the U.S. and Canada.

It now appears that the U.S. has passed the bottom of its housing markets at long last. After falling for six years from the 2006 high in a terrific bust, house prices are now widely rising from their lows, and house sales are increasing. So the U.S. is starting to come up from the bottom.

Canada is at the opposite end of the cycle. Having weathered the crisis of 2007-09 far better, it looks like Canada's housing markets have just gone over the top, a top of very high house prices and household debt levels, and now are starting down.

The U.S. Federal Housing Finance Agency's house price index for the third quarter of 2012, counting house purchases financed by Fannie Mae and Freddie Mac, was up 4% over a year ago, partially reflecting a lower proportion of distressed sales. This house price index rose in 39 of the 50 states. The widely followed S&P/ Case-Shiller National House Price Index was up 3.6% year-over-year in September. Since the American Consumer Price Index rose 2% during this period, this represents a 1.6% real increase. The Wall Street Journal recently opined that "an improving housing market is buoying consumers' spirits."

As is well known, the U.S. situation partially reflects manipulation of the bond market by the Federal Reserve, with its intention of driving down interest rates on long-term mortgages. In this the Fed has succeeded, with mortgage interest rates having arrived at record lows: 3.3% for 30-year, freely prepayable, fixed rate mortgages; and 2.6% for 15-year, freely prepayable, fixed rate mortgages. These rates must inevitably rise sometime, but no one knows just when.

Meanwhile, Canadians are debating "Canada's housing market: Is it a cooling? Is it a crash?" as the Canadian news magazine, Maclean's, recently put it, adding that "virtually everyone – from the Bank of Canada and the Finance Department [the banking regulator] through Canada's banks to the IMF and independent analysts – agrees that housing is losing steam."

House sales are falling and house prices are down a little on average and 11% in inflated Vancouver. One analyst has estimated Canada's house prices are 10% overvalued, another has predicted a 10%-15% drop in average prices and another as much as a 25% drop—of course, nobody really knows. Moody's bond rating service has discussed its concerns about "elevated housing prices."

The Governor of the Bank of Canada, before long to be the Governor of the Bank of England, Mark Carney, has issued renewed warnings about the high levels of household debt in Canada. Mortgage delinquencies are low—but they are always low in a housing boom. The question, needless to say, is what happens to them after the boom stops.

Canada, which has a major government exposure to mortgage credit risk, has made very sensible moves to reduce allowable loan-to-value ratios in government-insured mortgages. This is consistent with one of the most important ideas in housing finance: countercyclical credit policies.

In general, as house prices rapidly rise over their trend line, the price is growing riskier, and the amount lent against the current price should be reduced, with the required down payment correspondingly increased. This will help moderate the booms. What Canada did in this respect is admirable and directionally correct, but was it enough and soon enough? We will see.

Back in the U.S., the effects of the collapsed bubble continue, in spite of the recent market improvements. The government's Federal Housing Administration (FHA), which insures mortgage loans with the Treasury's credit, recently announced that it is insolvent by $16 billion. My AEI colleague, Ed Pinto, calculates that if the FHA had to keep its books like a private mortgage insurance company, its net worth would be a negative $25 billion. He further calculates that the present value of all projected cash flows of the FHA is negative $34 billion. The FHA has publicly tried to downplay the importance of its expected losses exceeding its resources. What a surprise that a government agency would react that way!

Another continuing effect of the collapsed U.S. housing bubble, when combined with the onerous mortgage regulation mandated by the Dodd-Frank Act, is that the private mortgage securitization business remains moribund. Almost all mortgage securitization is being done by Fannie Mae and Freddie Mac, both insolvent and now owned and managed by the government, and Ginnie Mae, a government corporation.

Pointing out the regulatory preference given to Fannie and Freddie, their financial travails notwithstanding, one securities firm has concluded that "the return of meaningful private securitization is extremely unlikely." A central policy question for the U.S. in the wake of the housing bubble, is how to reduce the government dominance of the housing finance sector?

Another effect of the collapsed bubble is the remarkable transformation of the balance sheet of the American central bank, the Federal Reserve. If you add the 12 Federal Reserve Banks together, the assets of the Fed have inflated to $2.9 trillion (up $2 trillion from the pre-crisis level). The combined capital of the Fed is $55 billion. In the Fed's new world, it now owns $900 billion, or 16 times its capital, of mortgage-backed securities. One way of looking at this is that the Fed has become the biggest savings and loan in the world. It owns more mortgage assets in portfolio that either Fannie or Freddie do.