What's wrong with housing?

The weather is warming up, home prices are still strong, and more listings are coming onto the market. This should all be the perfect combination for a robust spring housing market, but it just isn't turning out that way. It has been a week of weak numbers, and analysts are now revising down their estimates for 2014.

"Several key metrics of housing activity have shown notable weakness in the first three months of the year," wrote analysts at Morgan Stanley who downgraded the range of full-year 2014 sales to 4.75 million to 5 million units, a reduction of as many as 1 million homes. "In our view, the rationale for the weakness comes from a combination of three factors — severe winter weather; a transition away from investors reliant on distressed and cash purchases to mortgage credit-dependent buyers; and affordability challenges for first-time home buyers."

Home prices were up around 13 percent in February, according to the S&P/Case-Shiller home price index, despite the fact that sales have been waning since last summer, when mortgage rates jumped. Investors, having priced themselves out of several formerly hot markets, are now pulling back somewhat on purchases, leaving an historically short supply of lower-priced homes for a usually strong cohort, the first-time homebuyer.

"This institutional investor dynamic is a whole new era I think," Robert Shiller, creator of the S&P/Case-Shiller Home Price Indices, said on CNBC's "Squawk Box" on Tuesday. "As institutional investors start to play in the single-family market, that just changes it fundamentally."

Read More Home prices gain in February, beat expectations: S&P/Case-Shiller

Regular, credit-dependent buyers are just not coming back to the market as fast as expected. In fact, the nation's home ownership rate fell to its lowest level in 19 years at 64.8 percent in the first quarter of this year, according to the U.S. Census. Household formation is also running at about half the rate it should be, given current demographics and pent-up demand.

"Household formation is critical for the housing recovery. With so many young people living with their parents or roommates during the recession, the housing recovery now depends on how quickly young adults re-enter the housing market," said Jed Kolko, chief economist at Trulia.

Read More Mortgage applications take another deep dive

Credit, however, is still tight, and affordability weakening along with sales. Weekly mortgage applications plummeted to a four-year low last week; total applications fell 5.9 percent week-to-week on a seasonally adjusted basis, according to the Mortgage Bankers Association. Applications to purchase a home, which fell 4 percent this week from last week, are a clear and current indicator of the housing market's current state. These applications, which generally mirror pending home sales— signed contracts to purchase homes—are down 21 percent compared to the same week last year.

The number of signed contracts to buy existing homes were slightly higher in March from February, the National Association of Realtors reported this week, but analysts surveying activity on the ground have warned that April sales could be slower. The mortgage application numbers would appear to confirm that.

"Purchase application volume remains weak, despite other data which indicate that the overall pace of economic growth is picking up. The combination of higher rates, new regulations and tight inventory all are leading to a weaker spring market than we have seen in years," said Michael Fratantoni, the mortgage bankers' chief economist.

Read More Homeownership falls to 19-year low: Here's why

Inventory remains tight because builders are still operating at anemic volumes, while millions of home owners are trapped owing more on their mortgages than their homes are worth. Other homeowners don't have enough home equity to afford a move-up home. These potential sellers have no option but to sit the market out.

"All of our new households are renters and they aren't transitioning into ownership because of high prices in many metros, tight credit, high student debt and low rental affordability which makes it difficult to save for a down payment," said Stan Humphries, chief economist at Zillow (Z), a real estate website. "Over the past decade, the pace of rent increases has been double the growth in incomes. You don't have to be an economist to see a problem there."

While home prices are still at least 10 percent below their peak in 2006, the credit market today makes that price differential substantially larger. Home prices were able to soar to their 2006 highs because buyers didn't need much, if any, cash to buy a home. No-down-payment loans with short-term teaser rates made home purchases easy. Home prices were artificially inflated by cheap and easy credit. As we know, that model was unsustainable.