As homeowners everywhere search frantically for signs of a real estate recovery, it's worth taking a look at how markets recovered from previous regional busts. To that end, the Federal Housing Finance Agency--that's Fannie Mae and Freddie Mac's spanking new regulator--has released a research report examining just that. By looking at real estate crashes that occurred between the first quarter of 1975 and the first quarter of 2009 in inflation-adjusted terms, researchers uncovered some ominous findings:
First, house price downturns have tended to be long. The median time required to return to prior peak prices was 10½ to 20 years. Second, it tends to take longer for prices to rise from the trough to their former peak than it takes prices to decline from peak to trough. While the difference is small for Census Divisions and states, FHFA’s Metropolitan Statistical Area and Division (MSA) indexes suggest that the time from peak to trough tends to be about 3¾ years, whereas the median recovery period (from trough to prior peak) was 6⅔ years.
The paper went on to examine four distinct regional housing busts in greater detail. The authors, however, caution that comparisons between these regional busts and the current national one are limited. After all, while sharp spikes in unemployment tended to play leading roles in triggering the regional busts, such factors didn't spark the current one. (The authors used the agency's home price index in for research.)
From the FHFA:
New England: 1988-2001
The New England economy began to weaken in 1988. In prior years, unemployment in the region had fallen to three percent and per capita income had climbed to 123 percent of the national average. However, a more competitive computer industry, the end of the Cold War (and the resulting decline in defense contracts), and elevated business costs eventually resulted in high unemployment and high commercial and residential vacancy rates.
Figure 4 displays the real HPI for the New England Census Division. Real prices reached a sharp peak in the second quarter of 1988 and fell dramatically after that, ultimately losing over 32 percent of their value. Prices bottomed out in the first quarter of 1997, at which point a relatively speedy recovery ensued. Ultimately the New England housing cycle included an 8¾-year period of decline followed by a brief, 4¾-year recovery to its previous peak.
California: 1989-2001 and 2006 to Present
The California economy expanded rapidly in the 1980s. Gross state product grew at an annual rate of 5.1 percent from 1983 to 1989, well above the national growth rate of 3.6 percent. 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, the California economy had begun to deteriorate and entered into a recession. A substantial decline in national defense spending seriously hurt California’s booming defense industry. In addition, the national recession of 1990-1991 reduced the demand for goods and services produced in California. Unemployment increased, and the California real estate market subsequently collapsed.
Figure 5 shows the real HPI for California leading up to the house price downturn that began in the fourth quarter of 1989, through the price trough in the first quarter of 1997, into the ensuing recovery, and ending in the current downturn. As in New England, California’s downturn in the early 1990s had a relatively speedy recovery (4¾ years) to its previous peak.
In the early 2000s California experienced a particularly large house price boom fueled by a marked increase in the availability of mortgage credit. Real house prices in California peaked in the first quarter of 2006. The ensuing subprime mortgage crisis hit California particularly hard. As of the first quarter of 2009, real house prices have fallen almost 44 percent—far more than the 32 percent drop from 1989 to 1997.
Texas: 1982 - Present
Although the oil crises of the 1970s put a drag on the national economy, they had a positive impact on economic conditions and house prices in Texas. During the period, nonresidential construction activity in Texas more than quadrupled, while office vacancy rates fell from 15 percent to 7.6 percent in Dallas and from 7.8 percent to 5.7 percent 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 significant adverse effects on that state’s economy. When coupled with a weakening national economy, the oil price declines led to significant declines in employment. The layoffs began in the oilfields, but were followed by job losses in related fields (geologists and engineers) and next in service companies (motels, restaurants, and retail stores). By September 1986, 743,000 Texans were unemployed.
Figure 6 shows the real value of FHFA’s HPI for Texas since 1975. Prices peaked in the first quarter of 1982 and then declined steadily. Prices bottomed out in the first quarter of 1997 after losing 33 percent of their value. Texas’ real estate prices have yet to fully recover and now are roughly 15 percent below their prior peak.
Michigan and Detroit: 1979 - 1996
Michigan and Detroit are mirror images of Texas with respect to house 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.
Figure 7 shows trends in real home prices in Detroit during the price collapse and subsequent recovery. Real 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- hungry, American-made automobiles. Although the housing market grew relatively slowly during its recovery (3.55 percent), Detroit’s real HPI returned to its 1979 peak in 1996 (17¼ years later).