And At The Bottom We Shall Stay

David Reilly has a good column out at Bloomberg. He compares the housing bust to a tequila hangover:

After the most acute signs of distress have passed, it still takes a long time before things start to feel normal again.

His point: even if we have hit the bottom, it's going to take a long time to climb back out. He's right.

Housing market rebounds do not happen quickly. Sometimes they do not happen at all. Reilly explains this through an example:

To see a mirage-like rebound, look at Midland, Texas. That area is still waiting to fully pull out of a housing slump that began in the early 1980s.

Data from the Federal Housing Finance Agency show that inflation-adjusted prices in the Midland area finally bottomed about late 2000. They are still about 30 percent below their peak reached in 1982, the FHFA said in a June report examining past house-price declines.

This underscores how differently housing markets often behave compared with stock markets, which can quickly bounce back from lows.

Pulling out of a housing slump can take twice as long as it took for home prices to melt down, according to the FHFA. That fact should temper some enthusiasm over recent signs that housing markets are stabilizing.

And later:

In the past, it has generally taken about 10 years for home prices to go from peak, to trough, to peak, according to the FHFA report on housing downturns.

Yet "real home prices for many areas within the U.S. have not yet returned to values they approached in the 1980s," the FHFA report said. The agency found that real, inflation-adjusted home prices can take anywhere from 10 to 20 years to recover from previous peaks.

The housing market is far more complex than most other markets. In those other markets, renewed demand for a product is usually enough to start reducing excess supply and bring prices back up. Not so with housing, due to other factors. For example, banks that got burned by risky borrowers may increase underwriting standards to prevent that demand from fully taking hold. Securitization markets, traditionally having provided dollars for mortgages, may remain stalled as investors discover undervalued mortgage-backed securities in the secondary market providing greater return than new issues. Wary speculators who had money in real estate may choose to invest in stocks, bonds or commodities for the next few years instead. The list goes on. These complexities can result in a slow recovery.

Another characteristic about the housing market is that it varies widely depending on geography. The housing market in South Florida, for example, is very different from the housing market in Butte, Montana. For that reason, even if housing prices are appreciating in Butte they may not be in Miami. In fact, the worse a region was hit by the housing bubble, the longer it will likely take to begin to recover.

It's also important to note that on an inflation-adjusted basis, some areas could take decades to reach the price highs that were seen during the boom. 2% to 4% appreciation is historically warranted for real estate, while 10% to 20% is not. Real estate in many areas was overvalued, so once it hits the bottom, it may appreciate normally, but not irrationally.

The bottom of the housing market is a great time to buy a home as a long-term investment. But anyone looking to speculate and make a quick buck on real estate should look at other markets, unless you have a compelling reason to believe that a specific region will appreciate abnormally.