Over the past year, I’ve heard two questions asked on a near-constant basis: How long will this housing downturn last and how low will my market go?

Over the past year, I’ve heard two questions asked on a near-constant basis: How long will this housing downturn last and how low will my market go? The simple answer is: when the inventory stops piling up.

To figure out when that will happen, housing economists study reams of data on building permits, housing starts, mortgage rates, loan resets, affordability indexes, job growth and a host of other factors including consumer psychology. Before you hear the answer from someone’s crystal ball, it’s worth establishing some historical context for your local market.

The most obvious questions are:

How long ago did the market hit its peak? Markets like Seattle, Charlotte and Atlanta are still rising. On the other hand, Boston peaked in September 2005, San Diego in November 2005 and Detroit in December 2005.

How far has the market fallen since hitting its peak? Detroit has fallen the furthest with a 12.4 percent decline as of July 2007, the most recent month for which the S&P Case Shiller indices have been published. San Diego and Tampa have both declined more than 8 percent so far. On the other hand, Chicago and Denver have fallen by less than 2 percent from their peaks.

How big was the run up in prices prior to the market peak? The big California markets all experienced increases of more than 200 percent in the 10-year period prior to hitting their peaks. Miami also soared more than 200 percent. In fact, 10 of the 20 markets in the table below all saw increases of at least 150 percent. The Midwestern markets saw much more restrained price appreciation with a low of 41 percent in Cleveland and a high of 117 percent in Minneapolis.

Looked at in this way, the contrasts are stark. Both the Los Angeles and Cleveland markets peaked in mid-2006 and both have fallen less than 5 percent, but Los Angeles appreciated 267 percent in the prior 10 years while Cleveland was up just 41 percent. You can reach your own conclusion about the desirability of living in Cleveland versus Los Angeles, but the downside price risk in your house would probably be a lot lower in Cleveland at this point.

While local market price direction is largely driven by local supply-and-demand factors, it’s worth considering your market’s recent past before you try to peer into its future.

Stephen Bedikian is a partner at Real IQ, which provides consulting and housing market analysis. He can be reached by phone at: (310) 871-3737 or by e-mail: sbedikian@realiq.com. Or contact him via his blog at http://realiq.wordpress.com/.

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