We see a lot of news about home prices, both good and bad. Nobody can predict the future, but we might find clues about it in the past. The Case-Shiller Home Price Index, captured the California home price collapse in 1990, as shown in the first chart – for high-tier Los Angeles homes. Then the prices had increased by about a factor of two, just like our last bubble, as shown in the second chart. The scale in the first chart has been expanded to show they were very similar bubbles, even to their relative size, shape, duration and the false recoveries in 1991 and 2007. Maybe we can use the 1990’s experience to project our current recovery.
If so, the blue bars show that it took seven years from the peak to just get to the point where prices began a true recovery. Our price recovery may not start until 2013, and this is a worse economic situation than in the 1990’s. In between now and 2013 we may see still lower prices. It is difficult to tell if the small peak we see today is a false recovery or the reaction to an overshoot in the drop, but from the last bubble it is not likely the beginning of recovery. Again historically, that increase around 2013 will be at the rate of inflation, which in the long term is around 2.5% a year. If so, this is relative price stability and isn’t bad news – volatility in home prices is the bad news because neither sellers or buyers know what to expect. – Wayne Longman
