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The housing market continues to drag down the American economy. New construction and home sales are usually doing the opposite at this stage of an economic recovery. President Obama hoped that once the economy began improving, housing would follow.

Instead, it seems the government must address housing in order to give the economy a positive jolt.

Those who are at risk of losing their homes are taking payday loans, cash advances, and securing funds in any other way possible. The government cannot help all of them. Instead, it should focus on reducing the oversupply of 3.9 million homes, allowing the bottom to fall out of the market.

Housing can then begin its long journey to prominence.

What the government can do for underwater borrowers is reduce their mortgage principal. Default of these borrowers would overwhelm the foreclosure system, cause neighboring homes to decline in value, and subject the economy to a major setback.

In 11 million households, homes are worth less than their mortgages. This represents over 20 percent of the total U.S. housing market and addressing this group could make a huge difference.

The S&P/Case-Shiller index released on Tuesday reflected a 4.5 percent decline in home prices from May 2010, the largest drop in 18 months. Since housing prices peaked in July 2006 within the 20 largest cities in the nation, they have decreased 33 percent.

Though the number of home foreclosures have decreased, it is likely a false respite due to the robo-signing issue.

Housing has not responded positively to various relevant government programs for over three years. The government has not gotten more involved for many good reasons. Now, it seems it has no choice. Encouraging Freddie Mac and Fannie Mae to provide assistance to underwater mortgage holders could help.

State and large bank settlement negotiations could also make a positive difference.