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Seeking a "Normal" Real Estate Market: Using Housing as the Barometer

Last week a client posed upon me an interesting question.  He asked when I thought that the real estate market will return to normal.  My response: “Normal? Now that IS interesting! … I guess it all depends on how one defines normal.”   

My first reaction was to reflect back on what I have experienced over the nearly 40 years that I have been a licensed REALTOR representing clients throughout this region in the land and commercial brokerage business. 

Using the housing market as the barometer, from the early 1970″s up until surge of the new millennium, there were two spike periods (also known as Bubbles) in 1979 and another in 1989, both of which saw values jump and fall 15% to 20% over five year averages.  Putting the inflation factor aside, from the three very different recessionary troughs of 1975, 1983 and 1997, the housing market on a national basis rose only about 1% in real dollar value over that 22 year period! 

My experience was that each of the troughs generally impacted the land and commercial real estate markets in about the same way … some better, some worse.  And by the time the century turned its corner into the 2000″s real estate values were up again another 15% to 20% from the lows of 1997.

So … I guess my 20th century experiences defined a normal real estate market as volatile to the degree of 5% annual ups and downs, but in the end with inflation values increased about 3.5% per year.

But this got me wondering how this would plot out on a graph, and how the recent spike and fall of this decade compares to those of the late 70″s and 80″s… so I went searching for the answer on the web. 

The result of my efforts are shown in the above graph (click on to enlarge).  Courtesy of the website of renowned Yale University economist Robert Shiller,  this tracks the history of the housing market since 1890.  After adjusting for inflation and using 1890 as the base year (100), it shows that by the year 2000 (point “A” on the graph) values really only increased less than a total of just over 25 points above the 1890 base line!  … and 16 of those points occurred between 1997 and 2000! For me this put a new perspective on the meaning of normal in the 20th century.

But then along came the surge of the 2000″s!  Here, one can see the enormous difference between the 15% to 20% spikes in housing values of the last 50 years compared to the nearly 70% spike in real dollars between 2000 and 2006!  So now what is normal?!? 

An interesting observation from Shiller”s statistics is that 1st quarter of 2010 housing values have returned to the real dollar values of the year 2000 (points B and A respectively on the graph), and not too different from the peaks of 1979 and 1989.  The other interesting point is that when you study the other spikes and falls of the prior 50 years, the trend line appears to show that there may be a bit more of a fall in store for the national real estate market.

In speaking with local real estate appraiser Wayne Six, he thinks that the market is settling down.  He calls it a “Spilt Market” … a sign of improvement with housing values under the $300,000 mark holding, but properties above that still losing value at rates of 1/2% per month in the $300,000 to $500,000 arena and as much as 1% per month above the $500,000 mark.  Yes, this is an improvement!  It is showing that values are beginning to stabilize toward a normal market where values hold steady and modestly improve.  to the Frederick County Association of Realtors.

My search for the answer to finding a normal market also took me to an interesting website/blog by a guy named Chris Martenson, a former high level VP with a Fortune 300 firm.  He offers up a series of 19 videos on YouTube where he offers a “Crash Course” on the current economic situation.   Chapter 15 is a fifteen minute video entitled “Bubbles” in which he details all the craziness that influenced how we got to where we are today in the real estate market.  He uses the Shiller historical graph to show why the recent experience of this decade is very different … but then again trends may make it the same.  I found it fascinating enough to watch it several times, and then I viewed the other 18 chapters.  Very worth the time — exciting, chilling and extremely educational — a real page turner in the video sense!

So, after all this, I can say that I really don”t think that we can truly define a normal real estate market at this point in the new millennium … But if I have to, I”d say that extreme is normal

What are your thoughts?

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5 Responses to “ Seeking a "Normal" Real Estate Market: Using Housing as the Barometer ”

  1. Kyle Bostian says:

    Regarding your quote “the trend line appears to show that there may be a bit more of a fall in store for the national real estate market,” check out Dan Rodrick’s WYPR show from Wednesday 6/30. They were focusing on the high end of the Baltimore market, which has been rocked by the results of an auction Monday. It confirms, though, that there is still downward pressure in the market. http://www.wypr.org/midday.html

  2. Rocky Mackintosh says:

    Thanks, Kyle … downloading it now … be sure to view the Martenson Video I link to here.

  3. Here is a link to “the real estae roller coaster” on youtube. http://www.youtube.com/watch?v=kUldGc06S3U
    An exciting way to “experience” the chart you have above!

    As for normal, I agree with you. I’d say we’re experiencing a “normal” market for a recession. We experienced a very “abnormal” market for a boom during the years running up to ’06. So now, like a normal recession, corrections in the market are not so fun.

  4. [...] MacRo Report Blog posted on July 1, 2010, an article entitled “Seeking a ‘Normal’ Real Estate Market: Using Housing as the Barometer”.  It offers a  graph displaying the boom and bust cycles of the housing industry since 1890.  [...]

  5. [...] a look the Case-Shiller Historical US Housing Market Data Chart that we posted back on July 1st (Seeking a Normal Real Estate Market: Using Housing as  Barometer).    From this it is very clear that since the end of WWII, the US has experienced 5 major [...]

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