Editor’s note: With the end of a year marked by weakening housing markets drawing to a close, the question on many industry professionals’ minds is "When will this market hit bottom and when will it start to recover?" In this three-part series, Inman News seeks insight from housing analysts who go deep to paint a picture of housing in 2008, compares this downturn to past cycles and seeks input from agents on how they are reacting with their business plans.

Editor’s note: With the end of a year marked by weakening housing markets drawing to a close, the question on many industry professionals’ minds is "When will this market hit bottom and when will it start to recover?" In this three-part series, Inman News seeks insight from housing analysts who go deep to paint a picture of housing in 2008, compares this downturn to past cycles and seeks input from agents on how they are reacting with their business plans. Read Part 1, "When will market hit bottom?") 

The housing market has always been cyclical, with varying elevation in the peaks and valleys.

This time around, the market climbed to Mt. Everest-like heights. And the fear among market analysts is that we may be staring down at a drop of Grand Canyon proportions.

Some are calling this the worst housing market downturn since the Great Depression, while others are drawing parallels to the tech bubble, and to housing slumps in the 1980s and 1990s.

History may not be a foolproof guide for the future course of the housing-market downturn, as there are many unique elements at play in the latest market run-up and a lot of guesswork about the bottom of the market.

It was author Mark Twain who said, "History doesn’t repeat itself — at best it sometimes rhymes."

Nicolas Retsinas, director of Harvard University’s Joint Center for Housing, referenced this adage in describing housing-market cycles.

"Every one is different — the circumstances are different," even if there is a parallel context, he said.

A study of past housing cycles has found that the median span of downturns is about 24 months. That’s the good news.

The bad news is that this market cycle is already about 20 to 21 months into a downturn, and it looks like it will last at least twice that long, Retsinas said.

"Generally speaking there is a correlation between housing downturns and recessions," he said, though it’s not yet clear to him whether the housing downturn will cause a recession this time around.

The emergence of the global economy is a notable difference in the current market cycle, he said, and there are differing opinions about whether the global economy will be brought down by U.S. housing and economic troubles or will carry the nation through tough times.

Jonathan Miller, executive vice president and director of research for Radar Logic Inc., a New York-based real estate research and analytics company, said that the New York City market has benefited from a weak U.S. dollar, as it has heightened foreign investment in the region.

Miller compares the national housing-market slowdown to the tech boom and bust in the early 2000s, and refers to the liquidity problems in the mortgage market as a "credit bubble."

He said he never liked the phrase "housing bubble," and believes "credit bubble" more accurately describes the downturn because the credit crisis exploded onto the scene very suddenly — "everything changed within a couple of weeks."

He also said that the deterioration of mortgage underwriting standards was particularly pronounced in the latest market cycle compared to past cycles — and that ultimately is what killed the boom.

The Federal Reserve supplied a "post-9-11 shot in the arm" by sharply dropping rates, which "really primed the pump. Then you started to see a significant volume in transactions as people entered the housing market," he said.

"You had such a rapid acceleration in pricing, affordability became a significant factor."

A parallel in all housing-market cycles may be excess, Miller said. "I think there is always excess at one point in every cycle."

And he said he is not sure whether the mortgage industry will learn its lesson from the latest downturn.

"I think until there is real regulatory reform it will be status quo to a certain degree for the next cycle — the collective memory will forget this. There is nothing now that I’ve seen that would effect any real change in the outcome down the road," Miller said.

During a real estate conference in San Francisco in November, Robert Freed, CEO of regional builder SummerHill Homes, presented a series of headlines about the real estate downturn that could have been ripped from today’s newspapers, such as "tough lending laws hit real estate business."

That headline and others were from the 1990s, he later divulged. "This is and has always been a cyclical business. Those of us who have the patience and perhaps historical perspective are going to find some interesting opportunities."

Economist Dean Baker, co-director of the Center for Economic and Policy Research, is looking a lot further back than the 1990s for parallels to the current housing cycle.

"The housing market is in its worst downturn since the Great Depression — and it’s taking the rest of the economy down with it," Baker wrote in an article that appeared in the Oct. 1 issue of The Nation.

Baker said that home prices had increased at the same pace as the overall inflation rate from 1895-1995, but since 1995 inflation-adjusted house prices have jumped about 70 percent.

"Like Japan’s in the 1980s, the U.S. housing bubble coincided with its stock bubble. While the two bubbles burst simultaneously in Japan, in the United States the stock collapse actually fueled the growth of the housing bubble," he wrote.

Unlike the stock crash brought on by the dot-com boom and bust, the housing crash will likely be more difficult to bounce back from, Baker told Inman News.

And the Federal Reserve should pay more attention to financial bubbles, as they have real potential to disrupt the overall economy.

"The big question the Fed is going to be facing: Whether to fight inflation or whether to avoid recession," Baker said.

Inflation did get out of hand during the economic downturn in the 1980s, he said, though he questions whether there is justification to "be so fanatical about moderate rates of inflation."

Economists have said that the latest housing-market cycle was moving out of step with the overall economy in some ways, and expect that it will move more in tandem with the overall economic cycle after this period of adjustment.

In many parts of the country, the housing downturn was more a product of rampant speculation, rapidly escalating prices, loose mortgage underwriting practices and overbuilding than it was a result of job losses and other economic troubles.

But if job growth slows and unemployment rises nationwide, housing market problems could multiply.

Josh Bivens, an economist for the Economic Policy Institute, said that the magnitude of the run-up in prices in the latest market cycle was far greater than that of the 1990s — and the fall from this peak could be more treacherous than in the past cycle.

"If we do enter a recession, there is something that is quite different about the magnitude relative to past ones," he said.

There are some rays of hope — exports have been picking up, and if the trade deficit begins to close then perhaps the nation could begin to recover some ground in the roughly 3 million manufacturing jobs that the nation has lost since 2000, he said.

Manufacturing jobs had held roughly steady between 16 million to 18 million from 1965-2000, he said.

The difference between the current market cycle and past market cycles is like the difference between a "V" and an "L," according to Ed Leamer, director of the Anderson Forecast, a quarterly economic forecast produced at the University of California, Los Angeles.

Past housing-market declines looked more like a V-shaped curve when placed on a graph — a sharp drop followed by a sharp rise. And this shape was also evident in the overall economy.

"The earlier episodes were coincident with a recession in which job loss was very substantial but also jobs bounced back very rapidly — thus a ‘V’ for the economy and a ‘V’ for housing," Leamer said.

"This time the economy is growing or flat through all of this and housing is experiencing the first leg of an ‘L.’" In other words, a steep drop that will be followed by a flattening.

The Federal Reserve’s actions to lower interest rates dramatically in 2003-04 precipitated the "mess we are in now," Leamer said.

Mark Dotzour, an economist at Texas A&M University, said he believes there are parallels between the 1980s, when commercial builders "just kept building product when there wasn’t any demand for it," and residential overbuilding in the latest market cycle.

Anthony Frank, founding chairman for Belvedere Capital Partners, a private equity investment firm that works to build financial services businesses, said during a November presentation at a real estate conference in San Francisco that a major difference between the 1980s market cycle and the current market is the role of Wall Street in mortgage financing.

"Wall Street had no connection with mortgages for … decades. And now they do. In fact, almost all of the mortgages that get sold go through Wall Street," he said.

"The operative word for Wall Street is now, ‘I don’t want to talk about the long-term needs of you all. I don’t want to talk about the values going up. I want my bonus now. And indeed many of the Wall Street firms think that now is too slow and they want a transaction pre-sold even before it becomes available. It becomes a scandal."

Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at University of California, Berkeley, also spoke during a San Francisco conference last month and said that housing-market slumps occur about every 10 years. And while this downturn could be more severe than some past cycles, he said it is definitely not a surprise.

***

What’s your opinion? Send your Letter to the Editor to glenn@inman.com.

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