Recovery: How Long Did it Take Last Time?
January 5, 2010 in 2010 Predictions, Best Of The Storm, Fresh Perspectives by Andrew Jeffery
This post first appeared in the SPECIAL EDITION: Cirios Trends: A Decade in Flux
The aforementioned warning about historical analogues notwithstanding, let’s take a look at how the housing market recovered the last time there was a persistent decline in home prices.
As an aside, one of the most challenging aspects of analyzing the current housing recession is how infrequently home prices have fallen for an extended period of time. Since 1965, this is only the third time the US housing market has experienced two or more consecutive months of year-over-year price declines.
The most recent such decline occurred in 1991 as the housing market reeled from the Savings and Loan debacle. For those unfamiliar with the S&L crisis, banks and thrifts found themselves overleveraged to residential mortgages as home prices fell. Clearly, we learned our lesson.
The peak of the 1980s real estate boom, as measured in year-over-year appreciation, registered 28 months earlier than the top in prices, not a dissimilar tally as our the most recent boom. On the way back up, from the bleakest moments in 1991, it was 18 months until we saw a meaningful pickup in home prices.
Of important consideration in examining this historical example, however, is the way in which government action affected the cleanup of each respective housing bust. The Resolution Trust Company, or RTC, was created in 1989 to liquidate distressed real estate assets gumming up the country’s banking system. And while many argue this strategy ushered in a de-facto policy of moral hazard that culminated in our recent financial crisis, others widely hail the strategy as cordoning off the damaged segments of the banking system so the rest of the industry could heal on its own.
We have no RTC2 to clean up this mess, but we are certainly flush with government schemes to prop up the housing market. The relative effectiveness of these programs will go a long way to determining when the good old days of steady home price appreciation will be back again.
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