A housing bust is a lot like a tequila hangover. After the most acute signs of distress have passed, it still takes a long time before things start to feel normal again.
So even if housing markets are approaching or have reached a bottom — a matter of great debate at the moment, especially given yesterday’s release of May home-price figures — history shows a rebound isn’t likely to be anywhere near as fast or furious as the meltdown it followed.
Sometimes, rebounds don’t happen at all. Not, at least, without a large dose of inflation. And that carries its own risks for the economy and investors.
To see a mirage-like rebound, look at Midland, Texas. That area is still waiting to fully pull out of a housing slump that began in the early 1980s.
Data from the Federal Housing Finance Agency show that inflation-adjusted prices in the Midland area finally bottomed about late 2000. They are still about 30 percent below their peak reached in 1982, the FHFA said in a June report examining past house-price declines.
This underscores how differently housing markets often behave compared with stock markets, which can quickly bounce back from lows.
Pulling out of a housing slump can take twice as long as it took for home prices to melt down, according to the FHFA. That fact should temper some enthusiasm over recent signs that housing markets are stabilizing.
Yet “real home prices for many areas within the U.S. have not yet returned to values they approached in the 1980s,” the FHFA report said. The agency found that real, inflation-adjusted home prices can take anywhere from 10 to 20 years to recover from previous peaks.
Of course, home prices look better in Midland, throughout Texas and nationally when they aren’t adjusted for inflation. So-called nominal home prices in Texas, for example, are up 80 percent from an early 1990s trough.
In this case, inflation is a meltdown antidote. Yet it isn’t clear the U.S. can easily inflate its way out of the current housing hole.
Talk of housing bottoms almost always assumes home prices will rise. That can be a dangerous notion, as many boom-time home buyers discovered.
I was reminded of this while visiting an open house last weekend in Scotch Plains, New Jersey. The house for sale was instructive because it had been built in the late 1700s and the broker supplied a transaction history.
The first ownership change with a listed dollar amount occurred in 1870, when the two-story, clapboard farmhouse sold for $13,000. Two years later it changed hands for $12,000.
The house wasn’t sold again until 1911, fetching $7,200. That marked both a nominal, and real, loss for the sellers. Two years later, the house was foreclosed on.
In 1927, the house sold for $13,500. The next sale, in 1949, was for $19,500, marking an annualized 2 percent return.
That wasn’t bad, given that the period included the stock- market crash, the Great Depression and the World War II recovery. Things were bleaker on a real basis. The Bureau of Labor Statistics inflation calculator shows that $13,000 in 1927 was worth an inflation-adjusted $19,040 in 1949. So, on a real basis, the sellers made just $400 over 22 years.
History is a good reminder that housing cycles are marathons, not short V-sprints.