Review of the last So Cal Housing Bust: 14 years until full recovery

Los Angeles-Glendale-Long Beach: Peak: 2nd quarter 1989 Bottom: 2nd quarter 1997 Depreciation: 36.7% Full Recovery: 2nd quarter 2003

Background:

The California economy expanded rapidly in the 1980s. Gross state product grew at an annual rate of 5.1% from 1983 to 1989, well above the national growth rate of 3.6%. The state’s economic growth was accompanied by substantial population growth, which led to a construction boom and large increases in real-estate prices.

By 1989, a substantial decline in national defense spending seriously hurt California’s booming defense industry. In addition, the national recession of 1990-91 reduced the demand for goods and services produced in California. Unemployment increased, and the California real-estate market subsequently collapsed.

California’s downturn in the early 1990s had a speedy recovery of less than five years to its previous peak.

In the early 2000s, California experienced a particularly large home price boom fueled by a marked increase in the availability of mortgage credit. Home prices in California peaked in the first quarter of 2006. The ensuing subprime-mortgage crisis has hit California particularly hard. As of the first quarter of 2009, home prices have fallen almost 44%, adjusted for inflation, far more than the 32% drop from 1989 to 1997.

The Federal Housing Finance Agency last week released a study of real-estate downturns since 1975, tracking home prices from the quarter in which the declines began to the quarter in which inflation-adjusted prices returned to their previous highs.

Prices typically fell for three years and nine months, the agency said, but the average recovery took nearly twice that long: six years and eight months.

With such a quick and steep drop in the median Southern California home price since 2006, will a recovery be quicker than seven years?

Source: MSN Money: 4 of America’s nastiest housing busts