The housing market over the last 40 years in America has always been cyclical. There were periods of rising prices and periods of falling prices. Some would call these boom and bust markets.
The recent real estate market collapse makes us wonder if this particular boom and bust cycle is an anomaly or something that has happened before in the U.S. Housing Market.
And if you are a real estate investor in today’s market, or an “underwater” homeowner, then you are certainly wondering just how long this downturn might last. Is there really a light at the end of the tunnel?
These are all good questions. But unfortunately, what has happened in the past may not be a good indicator of what will happen in the future. The housing market and other indicators today are often too complex to be able to draw an easy cause and effect conclusion from any past history. The crystal ball is more opaque than ever.
Still, due diligence would indicate that at least looking a boom and bust periods over the years would be helpful in understanding today’s markets and trends. They may not clear up the crystal ball but at least they may shine some light on possible future trends.
After all, the belief has always been that investing in real estate was probably one of the most reliable and safe ways to create a stable financial future for you and your family. This may still be true, but the last few years has shaken our faith in that belief. We all feel we need answers.
This Housing Bust of 2007
The housing market has always had periods when prices have risen and periods when prices went down. But the fact is there has been no parallel to the housing collapse of 2006-2007. From 2000 to 2006 housing prices rose more sharply than at any other time in American history. And after 2007, prices had never gone down so sharply. The chart below makes that clear.
In fact, previous to 2000 the housing market showed are fairly slow, steady growth over the previous 30 years. Yes there were some downturns, but they were smaller and shorter lived than what we have seen recently.
Housing prices went up so quickly in the early 2000′s, it’s almost easy to see why most investors, homeowners and first-time buyers went a little “crazy.” At the time, it seemed as if it would last forever, and if they didn’t move they would miss out on a great opportunity. For some it was a dream come true. For many it turned into a financial nightmare.
As you can see from the chart, there were times when prices began to rise relatively quickly, and were followed by a fall in prices. The mid 70′s, mid 80′s, and mid 90′s all experienced declines in housing values after periods of rising prices. The declines were eventually followed by recovery periods that could be interpreted as booms.
These booms and busts were modest compared to what happened in the 2000′s but they were still positive motivators for real estate investors and home owners and indicated that eventually markets do recover. In general, our faith in real estate as an investment was justified over the previous 30 years. What happened in 2007 has shaken that faith.
So What Does It All Mean?
If you look at the chart, it would seem that current housing prices are back in line with what happened over the past 40 years. The pricing trend line followed from 1970 to roughly 2000, if continued to 2011 seems to make sense. You could argue that housing prices have stabilized and may be back to “normal.”
But what does the future hold? Will housing prices begin to rise again and accelerate?
There is something different about today’s housing market compared to other downturns. Foreclosures are at an all time high. While there are many homes in foreclosure and even more that are underwater and have mortgages that outweigh the current market values of the homes, the market will only be able to rebound slowly. Most realtors and housing experts say that once the glut of distressed homes, and distressed homeowners, is reduced substantially then the market may return to a more typical cycle. Things will only change once confidence has returned.
If you own a home, or have an investment in real estate now, then only time will tell.
But if you want to buy now, this could end up being one of the best times to invest. You may not see a quick return on your investment, but it could be the case that housing prices will never be this low again. And in 10 years you may find you picked the right time to get back into the market.
If anything, what we have learned over the past 40 years is real estate investing takes persistence, perseverance, and patience.