House Price Declines: How Long for Real Prices to Recover?

Recent reports show house prices are up more than 20% year-over-year, however house price data is seriously lagged and haven’t yet reflected the impact of higher mortgage rates. With inventory almost doubling since March, and likely to be up soon compared to the same week in 2020, reported house price growth should slow sharply in the coming months.

My base case is that house prices will “stall” in nominal terms and decline in real terms (adjusted for inflation). If price do stall, an interesting question is how long will it take for real prices to recover to the previous peak?

This is academic with regards to the current situation since real house prices haven’t even peaked!

Housing economist Tom Lawler sent me some old FHFA research from 2009: A Brief Examination of Previous House Price Declines.   

In the initial sections of the paper, house price declines and recoveries are analyzed using inflation-adjusted prices; home prices are gauged relative to the price trends for all other goods and services in the economy, which is measured using the Bureau of Labor Statistics' Consumer Price Index (CPI) for “all items less shelter.” Each geographic area is assigned at most one trough and one peak (prior to the trough). Troughs are flagged as the points at which the percentage distance between the real HPI and the previous high is most negative. Once the trough has been identified, the peak is defined as the previous high in the real HPI. The point of recovery is defined to be the date at which the real HPI has returned to the previous peak value.

For real prices, I also adjust using CPI, all items less shelter. A conclusion from the research:

First, house price downturns have tended to be long. The median time required to return to prior peak prices was 10½ to 20 years. Second, it tends to take longer for prices to rise from the trough to their former peak than it takes prices to decline from peak to trough. While the difference is small for Census Divisions and states, FHFA’s Metropolitan Statistical Area and Division (MSA) indexes suggest that the time from peak to trough tends to be about 3¾ years, whereas the median recovery period (from trough to prior peak) was 6⅔ years.

emphasis added

If we use the median peak to trough, and add the median trough to prior peak, it is about 10 years to return to the previous real price peak following a bust for various MSAs.

Here is a similar look at national prices using the real Case-Shiller index (adjusted for inflation).

The real return following the ‘79 peak was 6.5 years. It took 11 years for real prices to reach the previous peak following the peak in ‘89.

And it took 14.5 years to return to the real peak reached during the housing bubble.

This is a little premature, but following a downturn, it typically takes a long time for prices to return to the previous real price peak. Of course, homeowners think in nominal terms, and if prices just “stall”, they usually don’t notice the inflation adjusted price decline.