Surprisingly consistent: Over the past 30+ years, the period between a recovery beginning and a bubble popping has run approximately 6 years, which is not really much time to go from a negative market outlook to "irrational exuberance." We are currently something less than 2 years into the current recovery. Periods of market recession/doldrums following the popping of a bubble have typically lasted about 4 years. Generally speaking, within about 2 years of a new recovery commencing, previous peak values (i.e. those at the height of the previous bubble) are re-attained -- among other reasons, there is the recapture of inflation during the doldrums years. In this current recovery, those homes hit hardest by the subprime loan crisis -- typically housing at the lowest end of the price scale in the less affluent neighborhoods, which experienced by far the biggest bubble and biggest crash -- may take significantly longer to re-attain peak values (see the fifth chart down), but higher priced homes are already doing so. These general timelines of recession, recovery, bubble and market adjustment (or crash) can be discerned in the longer-term charts below. However, this does not mean that these recurring time periods necessarily reflect some natural law in housing market cycles, or that they can be relied upon to predict the future.
(After Recession) Boom, Decline, Doldrums
In the above chart, the country is just coming out of the late seventies, early eighties recession – huge inflation, stagnant economy (“stagflation”) and incredibly high interest rates (hitting 18%). As the economy recovered, the housing market started to appreciate and this surge in values began to accelerate deeper into the decade. Over 6 years, the market appreciated almost 100%. Finally, the eighties version of irrational exuberance -- junk bonds, stock market swindles, the Savings & Loan implosion, as well as the late 1989 earthquake here in the Bay Area -- ended the party.
Recession arrived, home prices sank, sales activity plunged and the market stayed flat for 4 years. Still, even after the decline, home values were 70% higher than when the boom began in 1984.
1996 to Present
(After Recession) Boom, Bubble, Crash, Doldrums, Recovery
This next cycle looks similar but elongated. In 1996, after years of recession, the market suddenly took off and became frenzied -- similar to what we’re experiencing today. The dotcom bubble pop and September 2001 attacks created a market hiccup, but then the subprime and refinance insanity, CDOs and derivatives, Ponzi schemes, books titled “Dow 30,000” and claims that real estate never declines, super-charged a housing bubble. From 1996 to 2006/2008, the market went through an astounding period of appreciation. (Different areas hit peak values at times from 2006 to early 2008.) In September 2008 came the market crash.
Across the country, home values fell 15% to 60%, peak to bottom, depending on the area and how badly it was affected by foreclosures -- most of San Francisco got off comparatively lightly with declines in the 15% to 25% range. The least affluent areas got hammered hardest by distressed sales and price declines; the most affluent were typically least affected. Then the market stayed flat for more than 3 years, albeit with a few short-term fluctuations.
San Francisco from 2010 to 2013
A Strong Recovery in Process
In 2011, San Francisco began to show signs of perking up. An improving economy and growing buyer demand coupled with a low inventory of listings began to put upward pressure on prices. In 2012, as in 1996, the market abruptly grew frenzied with competitive bidding. The city’s affluent neighborhoods led the recovery, and those considered particularly desirable by newly wealthy, high-tech workers showed the largest gains. However, virtually the entire city is now experiencing a high demand-low supply dynamic and the resulting rapid price appreciation.
The SF median house sales price increased dramatically in 2012 and then accelerated further in the first half of 2013, though varying by neighborhood. By all appearances, San Francisco and the Bay Area are in the midst of a very healthy recovery, though the economy always remains susceptible to big financial/political crises. New home construction is rising very dramatically, distressed sales are declining dramatically, the rent vs. buy equation has turned favorable to buying, interest rates are still relatively low (despite their recent spike in summer 2013) and general economic conditions seems to be continuing to improve.
The 1983 – 2013 Overview
Up, Down, Flat, Up, Down, Flat...Up
Smoothing out the bumps delivers this overview for the past 30 years. Whatever the phase of the cycle, up or down, while it’s going on people think it will last forever: Every time the market crashes, the consensus becomes that real estate won’t recover for decades. But the economy mends, the population grows, people start families, inflation builds up over the years, and repressed demand of those who want to own their own homes builds up. In the early eighties, mid-nineties and in 2012, after 3-4 years of a recessionary housing market, this repressed demand jumps back in (or "explodes" might be a good description) and prices start to rise again. It's not unusual for a big surge in values to occur in the first couple years after a recovery begins.
Bay Area Bubble, Crash & Recovery by Price Range
This chart illustrates the huge differences in the degree of value increases and declines experienced by different price segments of single-family housing in the Bay Area: The lower the price range, the more it was affected by subprime lending, which created the bigger bubble; this led to a much larger percentage of foreclosures and distressed sales and a much more dramatic crash. San Francisco, with its expensive housing, suffered less than most places, though it still certainly suffered. Distressed sales never made up the huge percentage of sales they reached in other counties, and now, with the market rebound, distressed-home listings in SF have virtually disappeared and are rapidly declining everywhere.
Very generally speaking, the more affluent areas of the city saw a peak-to-bottom decline in the 15% to 20% range; the city’s middle price range saw 15% to 25% declines; and its lowest price segment went down 25% to 40%. (Some of the other areas of the Bay Area and country saw much larger declines as seen in the chart above.) The city is now seeing a rapid reversal of those declines - indeed some neighborhoods (as of summer 2013) now appear to be hitting or even exceeding the values of the previous peak of the San Francisco homes market in 2007-2008. It's still a bit early to make definitive conclusions, since values fluctuate for a number of reasons, including seasonality.