Media and the investment community have made much of recent good news on housing. Certainly, the recent upturn in sales, building, and real estate prices is welcome. But if the 1980s' housing bust is any guide, popular references to strength and imminent recovery grossly overstate. That older experience suggests that health in the sector will return only slowly. Residential real estate may well have turned a corner, but major gains and price recovery will likely wait for some time.

Though the housing boom of the 1970s and subsequent bust in the 1980s did indeed have different roots than the more recent experience, the pattern of that earlier experience is instructive, nonetheless. Back then, the housing surge grew out of the great inflation for which that period is famous. Rapidly rising consumer prices during those years, to double-digit annual rates, depressed the values of bonds, stocks, and all financial assets and drove Americans toward real assets, especially real estate. Their buying binge pushed up home prices rapidly, creating, in the process, a still greater incentive for people to buy still more. But when, in 1982, the Federal Reserve chairman Paul Volcker took sudden, radical action to stem the inflationary tide, the whole structure collapsed. The increase in interest rates engineered by the Fed first starved homebuyers for credit, but more, as the Fed began to prevail against the underlying inflation, the whole reason for the real estate investment bias evaporated.

The associated bust in home buying, building, and pricing shocked. In the first year after the 1982–83 peak, purchases of new and existing homes fell almost 20%. Homebuilding carried on a little longer, but by 1984 it had slumped almost 30% from its highs. The median price of a home in the United States fell some 5% in 1984 (a minor adjustment by more recent standards), but in an environment of still high inflation, it amounted to a real loss, of approximately 9–10%. Though the slide on all these fronts had largely run its course by 1985, the price declines and attendant disenchantment with real estate investing kept the lid on any recovery. Even five years later, in 1990, building activity remained more than 40% below its former peak. Actually, it did not surpass that early 1980s' peak until 2003, fully 19 years after the bust. Purchases of new homes, except for a brief flurry of activity in 1986, waited until 1989 to recover former highs. And median home prices still in the late 1980s were rising nationally by a mere 5% a year, barely any gain considering the higher inflation of that time.¹

Though this past picture clearly has some significant differences from more recent events, much is similar. If the more recent drive into residential real estate lacked the inflationary impetus of the 1970s and early 1980s, it was sustained, as back then, by the lure of a rapid price appreciation that, in both cases, developed its own momentum and tempted the use of massive amounts of leverage. If the more recent collapse resulted less from a radical shift in Fed policy, still Fed restraint between 2006 and 2007 did help foster it. Certainly, a sudden disenchantment with residential real estate as an investment was common to both busts. If this past is too different to present itself as a stencil from which to trace the future, it is, nonetheless, clearly close enough to offer guidance to that future.

This admittedly imperfect guide would, then, suggest that the present recovery is running late. The 1982–83 bust stabilized within three years, while this present recovery, whether gauged by sales, construction, or real estate prices, has waited well over five years from its initial slide to offer anything like stability. Of course, the longer wait is a natural reflection of the greater severity of this more recent correction, which saw sales, building, activity, and new home prices all fall much faster than in the early 1980s, respectively 70%, 60%, and 30% peak to trough. No doubt, the recovery would have been delayed longer still had not the Fed adopted a very easy monetary posture, something it delayed in the 1980s.²

Looking forward from this earlier experience suggests that a complete return to sector health will wait at least until 2015, and probably longer by some measures, to capture former highs. To be sure, the Fed this time is offering more stimulus and lower credit costs than in the earlier time, but markets also must overcome the deep scars left by the very severe correction of 2007–09. Even recognizing that precise timing from the past is always suspect, a conservative reading of the record should still lead investors and businesspeople to look for something less immediately impressive than recent enthusiasm suggests.