November 3rd, 2018 5:36 PM by Jackie A. Graves
Occasionally, you’ll hear an economist say
that U.S. home prices are too high in some cities and will likely fall—eventually. These forecasters are
meticulous about adding that the next real estate price correction will not be
like the 2007-2012 housing bust when U.S. home prices fell by one-quarter
and in some cities by one-half.
Robert Shiller, the Nobel Laureate economist with a good track
record of predicting bubbles, recently said home prices could see a
“significant correction or bear market” but, of course, he wasn’t expecting
anything like the 2007-2012 bust, according to MarketWatch.
We seem to have a very strong consensus that the next time home
prices fall, it won’t be like 2007-2012. No one, however, seems to be talking
about what the next real estate bust might actually look like.
Let’s look at the housing bust before the last one: the Savings
& Loan Crisis correction. What might that period of falling real home
prices in the early 1990s tell us about the next fall in U.S. home prices?
1990s versus 2007-2012
The Case-Shiller Home Price Index shows how incredibly steep the
rise and fall in home prices were from The Great Real Estate Bubble. It was the
steepest rise and fall in U.S. home prices on record. That’s not going to
Since 2012, however, the increase in U.S. home prices hasn’t
been as steep as the early 2000s but nominal home prices are higher now than at
the peak of the bubble in 2006.
If we adjust the Case-Shiller Index for inflation (using CPI-U)
we see that real U.S. home prices are below the 2006 peak, but they’re
nearly 40% above real home prices in 1990, 2000 and 2012. At the 2006 peak,
prices were over 50% above the real home prices in 1990, 2000 and 2012.
More to the point of this article, the nominal home price index
makes it look like home prices flattened out after 1990 but real home prices
Real home prices peaked in 1989, the recession hit in 1990, home
prices fell 7% from the peak until the end of 1990, the recession ended in the
spring of 1991 but real U.S. home prices continued to fade for years until
they bottomed out in 1997, down 14% from the 1989 peak eight years earlier.
If history repeats itself (it won’t) and the current cycle peaks
exactly 30 years later in 2019 instead of 1989, then real home prices would be
down 7% by the end of 2020, they would continue to fall slowly until 2027, and
real home prices wouldn’t get up back to 2019 levels until 2030.
Notice that even though the fall in real home prices was two and
a half times larger in the 2007-2012 bust, prices fell for years longer
following the S&L correction (8 years) compared to the far larger 2007-2012
bust (5 years).
Huge Variability Between Metros in 1990s
Unlike the 2006 bubble which hit most of the country, the 1990
bubble was really only a bubble in a few major metros, for example, in Boston,
New York, Los Angeles, San Diego, San Francisco and Washington DC.
If we again adjust the Case-Shiller numbers for inflation, the
real size of the 1990 bubble for those cities is easier to see.
In real prices;
Boston didn’t get back to its
1987 peak until 2000 (13 years);
New York didn’t get back to its
1987 peak until 2002 (15 years);
Los Angeles didn’t get back to
its 1989 peak until 2002 (13 years);
San Diego didn’t get back to
its 1990 peak until 2000 (10 years); and
San Francisco didn’t get back
to its 1990 peak until 1999 (9 years).
And remember, the 1990s are lionized as an economically
Back then home prices across the country weren’t as synchronized
as they were in the later bust. Many cities didn’t have much of, or any,
housing boom or bust at all. Home prices in Portland and Denver actually increased
significantly from 1989 to 1997.
Real home prices were up 50% in Portland and 25% in Denver while
at about the same time they were down 40% in Los Angeles and 30% in New York,
at least according to this inflation-adjusted data. We didn’t see such huge
differences between cities in the 2000s real estate bubble.
What might the early 1990s housing correction tell us about the
next real estate price correction?
1. Home prices can boom and bust even without a boom and bust in
subprime, interest-only, no-doc and neg-am mortgages.
2. Once started, home price declines (like price increases) seem
to become self-reinforcing and can continue on for quite a few years.
3. As metropolitan real estate markets have become more
synchronized, booms and bust may have become larger.
4. California seems to be particularly prone to unstable housing
In conclusion, a correction of home prices is likely at some
point and the next recession could be a trigger like the 1990 recession was to
Single-family landlords might want to become more defensive.
First-time home buyers might want to make sure they’re buying at
least a 10-year home, a home that is likely to suit their needs for at least 10
years, in case real home prices fall.
In all likelihood, the next real estate correction or bust will
surprise us and won’t be like either the early 1990s or 2007-2012. But I think
it’s extremely likely that at some unknown point, the residential real estate
market will slowly and surely change from this year’s “fear of missing out” to
“fear of losing money.”
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