It was just a few years ago when everyone thought home prices were on a permanent upward trajectory. Now a bearish pessimism dominates the market and experts see more declines on the horizon. Prices have been falling steadily since July 2006 and are off about 33 percent since their peak.
The length of this bear market is now average, using historic data going back to 1830.
The Winans International Real Estate Index shows that this is the sixth bear market in the past 181 years. On average, the previous five lasted 50 months. We’ve now seen 48 months of declining prices in this downturn.
Prices have fallen a lot less than the 55 percent average decline seen in the other bear markets. Recoveries back to the previous high come about six years after the bottom, on average.
Franklin Pierce was president in 1854 when the worst bear market began. Over the next four years, prices would fall by 77 percent before finding a bottom, which came as the nation was in a deep recession, known as the Panic of 1857.
Credit markets collapsed in 1857. Widespread speculation in railroad companies had led to banks and insurance companies becoming overleveraged trying to profit in the new economy.
Some small towns had even issued large amounts of municipal bonds to help railroads expand. Speculation and leverage led to defaults, and a mortgage and muni bond crisis led to a steep economic decline, which lasted for about two years.
Markets and the economy stabilized shortly after the government announced its plan for dealing with the crisis. President James Buchanan announced that “the government sympathized but could do nothing to alleviate the suffering individuals.”
We are unlikely to see a similar strategy come out of Washington this time, but we are likely to see a recovery in housing prices.
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