How long until housing recovers its losses?
A long time, if history is any guide. The Federal Housing Finance Agency last week released a study of real-estate downturns since 1975, tracking home prices from the quarter in which the declines began to the quarter in which inflation-adjusted prices returned to their previous highs.
Prices typically fell for three years and nine months, the agency said, but the average recovery took nearly twice that long: six years and eight months.
If that sounds depressing, consider the length of recovery times in the four regional housing busts the paper studied. On average, home prices in Texas are still 15% below their inflation-adjusted peak -- reached in 1982.
- Talk back: When will home prices recover?
The study, using regional and metro housing data going back four decades, went on to examine four busts in greater detail. The authors, however, cautioned that comparisons between historical regional busts and the current national one are limited; each of those studied was provoked by a sharp drop in employment, while the current bust was triggered by careless lending and borrowing practices.
The New England economy began to weaken in 1988. In prior years, unemployment in the region had fallen to 3%, and per capita income had climbed to 123% of the national average. However, a more competitive computer industry, the end of the Cold War (and a resulting decline in defense contracts) and elevated business costs eventually resulted in high unemployment and high commercial and residential vacancy rates.
Real-estate prices reached a sharp peak in the second quarter of 1988 and fell dramatically after that, ultimately dropping more than 32%. Prices bottomed out in the first quarter of 1997, at which point a relatively speedy recovery ensued. Ultimately, the New England housing cycle included a nearly nine-year period of decline followed by a brief recovery of just under five years to its previous peak.
The California economy expanded rapidly in the 1980s. Gross state product grew at an annual rate of 5.1% from 1983 to 1989, well above the national growth rate of 3.6%. The state's economic growth was accompanied by substantial population growth, which led to a construction boom and large increases in real-estate prices.
By 1989, a substantial decline in national defense spending seriously hurt California's booming defense industry. In addition, the national recession of 1990-91 reduced the demand for goods and services produced in California. Unemployment increased, and the California real-estate market subsequently collapsed.
As in New England, California's downturn in the early 1990s had a relatively speedy recovery of less than five years to its previous peak.
In the early 2000s, California experienced a particularly large home price boom fueled by a marked increase in the availability of mortgage credit. Home prices in California peaked in the first quarter of 2006. The ensuing subprime-mortgage crisis has hit California particularly hard. As of the first quarter of 2009, home prices have fallen almost 44%, adjusted for inflation, far more than the 32% drop from 1989 to 1997.
Although the oil crises of the 1970s put a drag on the national economy, they boosted the economy and home prices in Texas. During the period, nonresidential construction in Texas more than quadrupled, and office vacancy rates fell from 15% to 7.6% in Dallas and from 7.8% to 5.7% in Houston.
By 1982, however, oil prices had begun to fall, and, with each $1 drop in the price of crude resulting in an estimated loss of 25,000 jobs in Texas, declining oil prices had significantly hurt that state's economy. Coupled with a weakening national economy, the oil price declines led to significant drops in employment. The layoffs began in the oil fields but were followed by job losses in related fields (geologists and engineers) and next in service businesses (motels, restaurants and retail stores). By September 1986, 743,000 Texans were unemployed.
Home prices peaked in the first quarter of 1982 and then declined steadily. Prices bottomed out in the first quarter of 1997 after a drop of 33%. Statewide, Texas real-estate prices have yet to fully recover; they now are roughly 15% below their prior peak.
Michigan and Detroit mirror Texas with respect to home price downturns. What drove Texas' expansion in the 1970s and early 1980s caused the collapse of Detroit's economy, and what caused the collapse of the Texas economy caused Detroit's rebirth. As a result of the challenges facing the American auto industry after the oil crises of the 1970s and the subsequent emergence of fuel-efficient, foreign-made automobiles, Detroit experienced significant unemployment, and the local housing market collapsed.
Real-estate prices peaked in the third quarter of 1979 and fell precipitously until the fourth quarter of 1984, when the oil bust spurred demand for gas-gulping, U.S.-made automobiles. Detroit's home prices returned to their 1979 peak in 1996, more than 17 years later. They have since plummeted in the current downturn.