The Last 3 Housing Busts

Today’s Housing Market is Different but History Still Has Lessons

[An earlier version of this piece appeared in Barron’s in July 2022.]

When experts talk about how fast the current U.S. housing market is slowing and the possibility of a price correction they almost always end up saying something like, “But it won’t be like last time.”

That’s easy to say. The housing market during the Great Recession was the worst since the Great Depression. True, it’s unlikely we’ll see real, inflation-adjusted national house prices fall 37% like they did from 2006 to 2012 (measured by the Case-Shiller U.S. National Home Price Index adjusted for inflation using CPI-U Less Shelter).

But perhaps we’ll see real house prices in the 2020s fall more like they did during the two previous real estate busts. Here’s how those periods compare to today—and what might be next.

1977-1982, The Great Inflation Housing Bubble

• Nationally, real, inflation-adjusted house prices
  • Increased 18% over the first 3 years (1977-1979)
  • Fell 10% over the next 3 years (1980-1982)
• The number of both existing and new single-family houses sold fell 50% from 1978 to 1982
• At the bottom in 1982, real prices were back to 1977 levels

During the late 1970s, baby boomers were hitting first-home buyer age, so housing demand was growing fast. At the same time, some people noticed house prices kept up with inflation but their savings account balances did not, so buying houses as an inflation hedge became popular.

Our recent house price boom is a bit similar to the Great Inflation boom. Now it’s a surge of millennials hitting first-home buyer age. Rising mortgage interest rates ended our recent boom, just like the Great Inflation period.

A gigantic difference, however, is the sizes of the two booms. Real house prices increased 18% in the Great Inflation boom compared to 79% in our just-ended boom.

1985-1993, The Savings & Loan Housing Bubble

• Nationally, real, inflation-adjusted house prices
  • Increased 21% over the first 4 years (1985-1988)
  • Fell 13% over the next 4 years (1989-1992)
• The number of existing single-family houses sold fell 12% from 1988 to 1991
• Sales of new houses fell 32% from 1986 to 1991
• At the bottom in 1993, real prices were back to 1986 levels

This boom started in 1985 after mortgage interest rates dropped from 18% in 1981 to 13% in 1985. Rates were 10% by 1986.

Another big reason for this real estate boom was the deregulation of savings and loan associations. Some fraudsters bought S&Ls and used their money to fund their other businesses, often speculative real estate businesses.

The boom was centered in the Northeast and California, but many parts of the country had little or no boom. Metro New York City was hit hard. From its peak in 1987 to its bottom in 1997, real house prices in New York City fell 31%. Nationally, real house prices only fell 13%.

1997-2012, The Great Recession Housing Bubble

• Nationally, real, inflation-adjusted house prices 
  • Increased 76% over the first 9 years (1997-2005)
  • Fell 37% over the next 5 years (2006-2010)
• The number of existing single-family houses sold fell 42% from 2005 to 2008
• Sales of new houses fell 76% from 2005 to 2011
• At the bottom in 2012, real prices were back to late 1999 levels, 12 years earlier

A common view today is this was a credit bubble. Today, we don’t see the same crazy mortgages, so the market doesn’t face those same downside risks. On the other hand, we have a lot more investor-owned single-family houses today, which could cause unexpected reactions in a down market. It’s a lot easier for investors to sell in a falling market than for families who would have to find new places to live if they sold.

One factor, however, hasn’t changed since the Great Recession: The current system forecloses fast. In the earlier cycles, S&Ls dominated the mortgage market. They often originated, serviced, and held the mortgages themselves in-house. They could be slow to foreclose and sometimes during busts would actually rent out foreclosed houses to avoid having another distressed sale driving down the value of their other housing assets.

Today, it’s still often to the benefit of mortgage servicing companies to foreclose ASAP even though that drives down house prices faster. Foreclosures are low now, but this system could become a problem again if foreclosures increase a lot.

2012-202?, The Pandemic Boom and Bust? 

• Nationally, real, inflation-adjusted house prices
  • Increased 79% nationally over 10 years
  • The decline is just beginning

Skyrocketing mortgage interest rates have now put a stop to the sharp rise in pandemic house prices. We probably won’t see real prices fall as much as the 37% drop during the last cycle.

But we probably won’t see real prices fall as little as they did during the two previous busts (down 10% 1979-1982, and down 13% 1989-1993). That’s because prices increased 79% in the boom that’s just ending, more than the 76% increase during the 1997 to 2006 boom.

If we get a 10% correction nationally, be aware that some hot markets will see far larger falls. In the S&L bust, for example, real national house prices fell 13% but real Los Angeles prices fell 41%. But if we don’t have a correction, we face a different risk. The U.S. could end up like Canada, Australia and New Zealand since the Great Recession. Their house prices didn’t fall much and ever since their houses have been incredibly expensive. No, it wouldn’t be like last time. But it could be worse than the two earlier busts.