Housing Market Recovery May Take Years

There seems to be a widely held assumption that home prices will bounce back quickly. That's silly. The housing market just went through a bubble, meaning that prices reached unsustainably high levels. So why should prices return to those same levels anytime soon?

Setting aside this logical inconsistency (or is it denial?), there is plenty of precedent for long declines in home prices. Take a look at the chart, below, which shows the Case Shiller home price index for Los Angeles.

Los Angeles prices peaked in 1990, and then fell for the next six years. The peak-to-trough decline was roughly 25%. Prices didn't return to their 1990 levels until 2000

Of course, this doesn't mean that we should expect the same course of events for Bay Area home prices. For starters, prices here have already fallen more than 25%. But it does highlight the fact that home prices tend to move in lengthy cycles. We shouldn't assume that they'll quickly adjust to the latest economic news, whether good or bad. And remember, most economists are expecting a long, grinding recovery from the current recession. Why should the housing market do any better?