Recessions, Recoveries & Bubbles

1982 – 2013: A Simplified Overview Up, Down, Flat, Up, Down, Flat...(Repeat)

Above is a look at the past 30 years of San Francisco Bay Area real estate boom and bust cycles. Financial-market cycles have been around for hundreds of years, all the way back to the Dutch tulip mania of the 1600’s. While future cycles will vary in their details, the causes, effects and trend lines are often quite similar. Looking at cycles gives us more context to how the market works over time and where it may be going -- much more than dwelling in the immediacy of the present with excitable pronouncements of "The market's crashing and won't recover in our lifetimes!" or "The market's crazy hot and the only place it can go is up!"

Smoothing out the bumps delivers this overview for the past 30 years. Whatever the phase of the cycle, up or down, while it’s going on people think it will last forever: Every time the market crashes, the consensus becomes that real estate won’t recover for decades. But the economy mends, the population grows, people start families, inflation builds up over the years, and repressed demand of those who want to own their own homes builds up. In the early eighties, mid-nineties and in 2012, after about 4 years of a recessionary housing market, this repressed demand jumps back in (or "explodes" might be a good description) and prices start to rise again. It's not unusual for a big surge in values to occur in the first couple years after a recovery begins.

Surprisingly consistent: Over the past 30+ years, the period between a recovery beginning and a bubble popping has run approximately 6 years, which is not really much time to go from a negative market outlook to "irrational exuberance." We are currently something less than 2 years into the current recovery. Periods of market recession/doldrums following the popping of a bubble have typically lasted about 4 to 5 years. Generally speaking, within about 2 years of a new recovery commencing, previous peak values (i.e. those at the height of the previous bubble) are re-attained -- among other reasons, there is the recapture of inflation during the doldrums years. In this current recovery, those homes hit hardest by the subprime loan crisis -- typically housing at the lowest end of the price scale in the less affluent neighborhoods, which experienced by far the biggest bubble and biggest crash -- may take significantly longer to re-attain peak values (see the fourth chart down), but higher priced homes are already doing so.

The recurring timeline of recession, recovery, bubble and market adjustment (or crash) does not necessarily reflect some natural law in housing market cycles, or that they can be relied upon to predict the future.