2007 vs. 1989 - How will the busts compare?

[deejayoh]

I'd like to hear opinions on how this housing boom/bust cycle will compare with the last one - which occurred from 1989 to ~1994.

The NY Times had a graphic a while back that did a good job of comparing where we are today vs. that boom/bust. As you can see, the two cycles compared side by side (to date) look remarkably similar.



It's also good to look at peak to trough comparisons across markets to see what the impact was:


As you can see, the impact varied widely - from several markets at 1-2% to LA showing up as an extreme outlier at 27%. The 10-city Composite average was 8% and Seattle experienced a 6% correction.

So what do people think? How will this downturn compare to the last one?

Personally, I think this downturn will be worse than that one- but in the range of 1-2x the impact. I often see predictions of 40 or 50% declines in home prices - but I think they are about as likely as Ichiro batting .800. Theoretically, it could happen - but history has shown it's pretty unlikely.

However, based on this weekend, I am certain there will be healthy debate

[rose-colored-coolaid]

We've had a pretty sizable run up here. But the 90's case was a combo price run up followed by recession. We haven't seen a recession yet, and that is probably going to be was determines our status.

If Boeing keeps selling airplanes, and Microsoft keeps selling Office, Starbucks keeps selling coffee, Nordstroms keeps selling clothes, and Costco keeps selling everything...well maybe a mere 5% decline is feasible.

Keep in mind though, Costco is the only company on my list that sells essential items. The rest are either luxury items, or at best companies that require strong economic growth to fuel sales. Even Microsoft is becoming a luxury seller with the popularity of Linux, Firefox, Google Apps...


Anyways, I picked 1x-2x, even though I actually think 1.5x-2.5x is a better spread.

[mike2]

I've said this before, and I still think the largest difference will be interest rates. The 89-94 downturn was largely mitigated by a 40% drop in interest rates, from around 10% to 7% which helped restore affordability.

Given where we are in the global credit cycle, a similar decrease in rates seems unlikely. That leaves either falling prices or wage inflation to return equilibrium.

[sniglet]

My belief is that this cycle will be of an order of magnitude worse than anything that happened in the 1990s. The big difference between today and the previous real-estate downturns of the last 30 years is the explosion of dodgy credit vehicles (e.g. option ARM, 100% finance, negative amortization, etc). We have never had this degree of speculative finance employed in real-estate.

When you consider that negative amortization loans were less than 1% of the total in the '90s to being over 20% of the market in 2006, it becomes clear that things are much worse today than in past downturns.

Unfortunately, I think this downturn is going to be truly massive and result in a lot of pain. Any neighbourhood that manages to see only a 50% price drop will be exceedingly lucky, with prices dropping 80% to 90% in most places.

Let's put it another way: when the credit taps get turned off (which is slowly beginning to happen) there just won't be enough buyers with ready cash to fill the void.

Of course, I am NOT saying these dramatic price-drops will happen over night. But take 4 or 5 years of 20%+ price drops, and we can get there.

[deejayoh]

Good observation about interest rates. It's not entirely true to say they dropped steadily, they oscillated around a fair amount and were highest at the point the market pulled out of it's slump - which seems counterintuitive w/r/t your poing

12/89 = 9.86%
12/90 = 9.75
12/91 = 8.60
12/92 = 8.36
12/93 = 7.30
12/94 = 9.35%

http://www.hsh.com/mtghst.html

[sniglet]

[deejayoh]

[mike2]

[deejayoh]

[sniglet]

[deejayoh]

Best source for that is the CSFB report on mortgage lending. More than you want to know

[sniglet]

[Alan]

[sniglet]

[Alan]

I agree that the difference in lending will cause a bigger dip, but I don't know how big that dip will be. Will it be twice as deep? Three times? Maybe it will only be as much deeper as the peak is higher.