While housing pundits endlessly debate the depth and length of the current housing recession, Goldman Sachs recently published (US Daily Financial Market Comment, February 11, 2008) a helpful chart of historical data about similar contractions. Sometimes, the best way to get a handle on the future is to look in the rearview mirror. Statistics don’t necessarily mean a trend, but those below evidence a pattern: the deeper the contraction, often the more robust the recovery.
Goldman writes in its newsletter, “It is already clear that the current recession in US housing activity resembles, in magnitude and duration, the deep cycles that punctuated the first four decades of the post-World War II era more closely than it does the minuscule cycles of the last 15 years. For example, on a three-month average basis, new home sales and single-family housing starts have already fallen 50% and 53% from their cycle peaks in the mid-2005 and early 2006, respectively, and real residential construction is down about 29% over the past two years. These declines are much more comparable to those suffered in the housing recession of 1973 (Q1) – 1975 (Q1), 1978 (Q3) – 1980 (Q2) 1980 (Q4) – 1982 (Q3), and 1988 (Q4) – 1991 (Q1) than to the last couple in the mid-1990s and in early 2000, as shown in the table (above). Moreover, the current recession is far from over, at least in our judgment and increasingly in the views of others as well.”
There is plenty of room for pessimism, but a more realistic interpretation of events is that markets, in the end, always correct their own excesses. Whether the problem this time was overbuilding, loose credit, a steep rise in home values and thus equity credit lines, or all of the above, housing is now coming down to earth. Both new homes and resales will be repriced in the year or two ahead, a new bottom will form, and confidence will come back into the housing market stronger than ever.
Housing Recessions and Recoveries
