Housing booms don't always lead to busts
Should you rent and wait to buy a house after prices fall? Don't
get your hopes up. If history is a reliable guide, home values in your target
neighborhood probably won't fall. But they might stagnate long enough for your
income to catch up to prices.
year the Federal Deposit Insurance Corp. prepared a research report titled, "U.S.
Home Prices: Does Bust Always Follow Boom?" The answer to the question
in the title is no. Sometimes a housing boom ends not with a decline in values,
but with prices leveling off or rising slowly.
FDIC analyzed home-value data from the Office of Federal Housing Enterprise Oversight,
or OFHEO. The regulatory agency tracks value changes in repeat sales or refinancings
of single-family properties secured by conforming mortgages.
The first thing that FDIC regulators had to do was define
boom and bust. The agency defined a boom as any market where values went
up 30 percent or more in three years, adjusting for inflation.
Sticky situation: Defining
Defining a bust presented a problem. If the agency defined a bust as a
30-percent decline in three years, it would have a lot of booms but only
five busts. "The reason this measure proves to be too stringent is
that home prices tend to adjust slowly (or be 'sticky
downward' in economists' terms) during a downturn," the report
says. So the agency defined a bust more loosely, as a price decline of
15 percent or more in five years, without adjusting for inflation.
- Boom: 30 percent rise in three years, adjusting
- Bust: 15 percent drop in five years, not adjusting for
Keeping in mind that the definition of a bust is looser, the FDIC identified 63
markets that had enjoyed housing booms from 1978 to 2003, and 21 markets that
had suffered busts.
That 3-to-1 margin might be misleading, because prices
in some markets might not have had time to decline 15 percent in five
years. If you disregard the last five years that the study encompassed,
and look at just 1978 to 1998, you end up with 54 housing booms in 46
metro areas, vs. 21 busts. (Eight areas had two booms: The California
metro areas of Los Angeles-Long Beach-Glendale, Oxnard-Thousand Oaks-Ventura,
Sacramento-Arden-Arcade-Roseville, San Diego-Carlsbad-San Marcos, San
Francisco-San Mateo-Redwood City, and San Jose-Sunnyvale-Santa Clara,
plus Seattle-Bellevue-Everett, Wash., and Honolulu.)
"Only infrequently do home-price booms lead
to busts, at least by our criteria," write the study's authors, Cynthia
Angell and Norman Williams.
They sharpened their pencils a bit more. If a bust happens more than five years
after a boom, is it fair to say that the bust resulted from the boom? No, Angell
and Williams contend. Nine busts happened within five years of those 54 booms.
The other 12 happened long after booms.
is relatively rare for housing booms to result in a price bust, how do booms usually
end? Our look at history suggests that stagnation in home prices is often the
most likely outcome," they write. In a typical period of stagnation, values
rise about 2 percent a year for several years.
losses, not booms, cause busts
If booms don't typically cause busts, what does? Usually, severe local
recessions force people to move away to find work, and home prices crater
because there are many more empty houses than buyers. That happened in
oil-dependent cities from Alaska to Louisiana when petroleum prices crashed
in the 1980s. It happened later in California and New England, after the
Cold War ended, and the United States needed fewer war planes, ships and
Angell and Williams trace all but two of the housing
busts to falling oil prices and the end of the Cold War. The exceptions
were Peoria, Ill., and Honolulu. Peoria's home prices fell in the recession
of the early 1980s when demand for Caterpillar construction equipment
dried up. Honolulu's home values dropped when the tourism industry was
bitten twice in the 1990s, first by the California recession and then
by the Asian financial crisis.