Lessons from Past Housing Market Cycles

A recent Global Insight analysis observed more than 75 metro area home price corrections (declines of 10% or more) occurring between 1985 and 1997.

• The median home price decline in the surveyed areas was 17 percent.
• The typical duration of the documented corrections was four years.

Past Home Price Corrections

City	Correction Period	% Decline
Lafayette, LA	1985Q1-1988Q4	35%
Anchorage, AK	1985Q2-1990Q1	35%
Odessa, TX	1985Q3-1990Q1	28%
Austin, TX	1986Q2-1990Q3	27%
Los Angeles, CA	1990Q3-1997Q1	24%
Riverside, CA	1991Q1-1997Q1	23%
Hartford, CT	1988Q3-1997Q1	22%
Manchester, NH	1988Q2-1995Q1	22%
Kingston, NY	1989Q4-1995Q1	22%
San Antonio, TX	1986Q2-1990Q2	21%
Honolulu, HI	1992Q1-1997Q4	20%
Santa Barbara, CA	1990Q3-1995Q4	20%
Fairbanks, AK	1989Q1-1991Q4	18%
Waterloo, IA	1986Q1-1987Q4	16%
San Diego, CA	1990Q3-1997Q1	14%
San Francisco, CA	1990Q1-1995Q4	14%
Boston, MA	1988Q4-1993Q1	14%
Edison, NJ	1988Q2-1991Q2	13%
Portland, ME	1989Q4-1993Q1	12%
Greeley, CO	1986Q1-1988Q3	11%

Source: Global Insight

As you can see from the chart above, there are many U.S. cities that have experienced a housing bust in the past 20 years.

The most notable lasted around five years and occurred in 'oil patch cities' in Texas, Oklahoma, Louisiana and Alaska. Population inflows and an economic boom created a sudden demand for housing in these areas. Most of the oil producing cities experienced double-digit price gains in only two short years as oil prices surged.

When oil prices started to slip, so did the economy in the oil patch cities. It wasn't long before home prices began to fall too. Many cities saw declines of 25 percent or more during the five year freefall.

A similar boom and bust occurred in California in the early 1990's. After experiencing higher than normal gains, home prices began to fall. Common elements during the bust included economic depression and population outflow. California lost an estimated 150,000 jobs in the defense-related job sector alone during this period.

Can We Predict Home Prices Based on Past Corrections?

Yes and no. There is no clear formula that can be used to determine what current prices will do; however, history has taught us one thing. Double-digit price gains over a short period are not sustainable over the long-term.

Home prices are not meant to climb that fast. When overvaluation occurs, only one of two things can happen: prices will eventually drop to pre-boom levels or prices will stagnate for years until incomes catch up.

Then there is the age old story of the "Tortoise and The Hare." In markets that did not have the dramatic run-ups in value - that outpaced market fundamentals - steady home price appreciation continues.

The prime example is Texas, where the home markets did not have the dramatic gains in appreciation seen in most parts of the country, but where we continue to see home values appreciating at a steady and sustainable pace.

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The Tortoise and The Hare

There once was a speedy hare who bragged about how fast he could run. Tired of hearing him boast, Slow and Steady, the tortoise, challenged him to a race. All the animals in the forest gathered to watch.

Hare ran down the road for a while and then and paused to rest. He looked back at Slow and Steady and cried out, "How do you expect to win this race when you are walking along at your slow, slow pace?"

• Hare stretched himself out alongside the road and fell asleep, thinking, "There is plenty of time to relax."
• Slow and Steady walked and walked. He never, ever stopped until he came to the finish line.
• The animals who were watching cheered so loudly for Tortoise, they woke up Hare.
• Hare stretched and yawned and began to run again, but it was too late. Tortoise was over the line.

After that, Hare always reminded himself, "Don't brag about your lightning pace, for Slow and Steady won the race!"