Michael W. Boone, CFP, CFAThe mortgage insurance company, PMI Inc. did a study of real estate booms and busts in the past to see how long some previous downturns have lasted.  They looked at three boom markets: Houston in the ‘80s and Los Angeles, and Boston in the‘90s.  Here is what they discovered.

Houston housing prices began falling in 1983 and had fallen 23% by 1988, five years later.  They began recovering then and had finally reached their previous highs 14.5 years after the peak.  Prices in Los Angeles peaked in 1990 and fell 21% over the next 6.5 years.  They began to go up in 1997 and by 2000, 10 years after the previous peak, they had again reached 1990 prices.  Boston peaked in 1989 and fell for 3.5 years, recovered and fell again bottoming just 7% below their highs.  They once again reached new highs in 1998, 8.5 years after their previous peak.

PMI apparently took no account of inflation, which even at 3% will shrink the value of a dollar by 34% over 10 years.  In other words, when the housing prices caught up to their peaks again, the money wasn’t worth what it was the first time.  Secondly, an obvious shortcoming is that they did not count any carrying costs for the houses.  Even a house sitting empty is going to need maintenance; insurance and taxes are due and most houses have large interest expenses, too.  We generally figure 3% of a home’s value annually for expenses apart from interest, which itself could be 7% of the value annually.

This research is a great historical lesson of some recent housing booms and busts. Our takeaway is that housing bubbles can take a number of years to burst and much longer to recover, especially when inflation and  expenses are figured in.

 

http://media.corporate-ir.net/media_files/irol/63/63356/Fall_2007_ERET.pdf

 

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