Pundits who announced the imminent turnaround in housing over the last few years have been disappointed once again by the S&P/Case-Shiller 20-city composite for February which declined 0.8% from January and 3.5% from last year—despite a historically warm winter. The composite has fallen past the low point of the financial crisis to a level last seen in October 2002. Since that time, inflation as measured by headline CPI has eaten up another 27% (CPI calculator), which would take the composite back to the 1990s on an inflation adjusted basis.

Seasonal upticks in home values are likely as are upticks in areas with unique economic conditions—Silicon Valley with an IPO bubble, for example. Yet a long-term recovery is unlikely until a fundamental part of the housing market has healed: vacant inventory.

The housing bubble construction boom, which peaked in January 2006 with 2.3 million housing starts (annual rate), left behind a housing glut. How many vacant homes there were remains uncertain. The Census Bureau counted 18.8 million units in 2009. Others estimated it at 11 million units. Whatever the number, new housing construction, though it adds to GDP, simply knocks back the healing process.

And home sales are just noise. Someone who buys a home and sells the old one, then moves, triggers two transactions. But the move vacated the old home. Hence, a zero-sum event for vacant inventory. Only household formation can mop that up.

But household formation has been slow. Even though it recovered a bit in 2011, only 600,000 households were formed, a far cry from a range of one to two million a year in prior decades. Studies blame demographic changes, including the growth of multi-generational households—in part the result of economic hardship. Then there are the college graduates, the very generation we’re counting on to mop up the vacant inventory. But they may not buy a home for a long time as skyrocketing tuition has saddled them with mountains of student loans.

And there is another trend that contributed significantly to household formation before and during the housing bubble. But now, it has reversed—according to the Pew Research Center, whose report, released yesterday, doesn’t beat around the bush:

The largest wave of immigration in history from a single country to the United States has come to a standstill. After four decades that brought 12 million current immigrants—more than half of whom came illegally—the net migration flow from Mexico to the U.S. has stopped and may have reversed.

According to the report, Mexican immigrants make up 30% of all immigrants living in the US—and 58% of illegal immigrants. The second largest group, Chinese immigrants (including Hong Kong and Taiwan) amount to only 5% of all immigrants. Of the estimated 11.2 million illegal immigrants living in the US last year, 6.1 million were from Mexico. But that’s down from 7 million in 2007. Legal immigrants from Mexico rose slightly from 5.6 million in 2007 to 5.8 million in 2011.

Net effect: 700,000 fewer Mexican immigrants (legal and illegal) in the US. The report points at a number of factors, including the collapse of housing construction where many Mexicans worked. Thus, household formation from Mexican immigrants, after decades of explosive growth—which created demand mostly at the lower end of the housing spectrum—has reversed and is now contributing to vacant inventory.

But, but…. The US remains by far the most desired country, according to Gallup, which once again excelled in reading the minds of people from around the world. While immigration from Mexico is on the wane, 150 million adults worldwide still dream the American Dream and would still like to move to the US. That’s 1 in 30 adults! By contrast, 45 million people would like to move to the second most desired country, the UK, 42 million to Canada, 32 million to France, and 31 million, yes, to Saudi Arabia. Only 6 million people would like to move to Russia.

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