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Have U.S. real estate booms and busts changed?

Iris Price | Improvement Center Columnist | September 1, 2015

Like the stock market, real estate prices go through ups and downs with some regularity. According to Phillip J. Anderson, an Australian academic and investment blogger who studies U.S. real estate, booms and busts have occurred approximately every 18 years since the end of the Revolutionary War. If you have the stamina to hold onto your home for the long haul, you potentially stand to make money by selling before the next bubble bursts - as it seems to do inevitably.

What goes up must come down - and vice versa

Speculating in real estate has been a popular way to make money in the U.S. since the early days of our nation, but even then it had its booms and busts. Beginning in 1790, Robert Morris - Declaration of Independence signer, American Revolution financier and national Superintendent of Finance from 1781-84 - bought up millions of acres of frontier land with the goal of selling them off in smaller parcels. At first, all went well. Land prices went up modestly - not exactly a bubble, but the big land investors made money. Then interest rates began to rise and credit tightened. The speculators got burned when buyers became scarce. Morris mortgaged his holdings, but it didn't end well. In 1798, he went to debtors' prison.

We no longer throw anyone in jail these days for defaulting on their loans, and we try to head off bubbles - and their eventual bursts - by analyzing why they happened in the first place. Lending practices typically get an overhaul after each boom-bust cycle to prevent another such debacle, but with little success. Here are some highlights of U.S. real estate booms and busts prior to the 21st century:

The 1800s

The federal government began selling frontier land to investors at the start of the 19th century. Both large-scale speculators and homesteaders eagerly bought land on credit. Potentially lucrative agricultural land, especially in the South, began escalating in price just before the Panic of 1819 that threw the country into a recession. By 1820 land values had taken a nosedive and buyers, many in Alabama where land was bought for cotton farming, owed the federal government a total of $21 million. The first national-scale, urban real estate boom and bust, however, took place following a run up in land prices that peaked in 1836. The Panic of 1837 kicked off six years of recession, spurring the banks to hoard gold and silver. The country blamed the mess on President Martin Van Buren, successor to President Andrew Jackson, whose activities concerning the banks, some argue, caused it. The Gold Rush of 1849 eventually kick-started lending again and real estate boomed. Interest rates spiked in 1857, bursting the bubble, but picked up after the Civil War. Similar downturns occurred in 1873 and in 1893, both followed by low interest rates and several years of economic stagnation.

Early 1900s

In 1910, interest rates were low. Homesteaders were heading west to buy land and farm it or profit by selling it in a boom market. They were brought up short by the downturn when World War 1 ended, wheat prices fell, and drought set in. The excesses of the Roaring Twenties created the next bubble that culminated in the stock market crash of 1929 and the Great Depression. Along with plummeting stock prices, peak real estate values tumbled more than 25 percent. The value of building permits between 1929 and 1933 dropped 90 percent. Economists argue over whether the stock market crash caused the housing bubble to burst or the other way around. Regardless, in those days mortgages had short terms of only three to five years, after which the bank could set new terms and raise interest rates. Many borrowers defaulted on their mortgages. Left homeless, they set up urban communities of tents and shanties that became known as "Hoovervilles," after President Herbert Hoover, on whom they blamed the Great Depression.

Late 1970s and '80s boom/early '90s bust

Long-term, low-interest, fixed-rate mortgages (FRMs) combined with inflation and rising real estate prices in the late '70s/early '80s shrank the operating margins of the savings and loan associations (S&Ls, or thrifts, as they were called). To keep up with demands for larger mortgages, thrifts had to lend money at higher and higher rates for new loans until the Federal Reserve stepped in and put the brakes on rising interest rates in the early '80s. With nothing left to lose, the thrifts, looking for another way to generate funds, took a bet on making risky mortgage loans for commercial real estate ventures. Commercial building construction boomed, but there was hardly any business to fill the vacancies. Buildings went empty and prices dropped by 50 cents on the dollar. Thrifts went under at an alarming rate - more than 1,000 filed for bankruptcy between 1986 and 1995. Real estate did not begin to rebound until the mid-'90s. The bust was blamed on commercial overbuilding, but as with most boom and bust cycles, that was another oversimplification.

Real estate booms and busts in the 21st century

The housing bubble that began anew in the late 1990s ended with a recession in 2001. But between 2006 and 2008 home prices peaked again, fueled by - wait for it - easy-to-get mortgages. This time, loose-lending such as adjustable-rate mortgages with early-term teaser rates; no required documentation of income, and no down payment - among other questionable practices - contributed to the real estate madness. Refinancing to take advantage of home equity proved the undoing of many when prices peaked between 2006 and 2008, followed by the Great Recession.

Today, real estate seems to be recovering in many parts of the country; in some places, such as the San Francisco Bay area, home prices have already matched or exceeded peak prices from the last bubble. So the trick now is to take advantage of the bubble before it bursts again. If you're not able to, cheer up. Chances are good there'll be a next time.

Photo credit to Kevin Irby

About the Author

Iris Price is a single Baby Boomer whose antidote to a lack of retirement funds was to launch a long-delayed career as a writer. While others her age concoct bucket lists and travel the world, she bought a new-construction home and obsessively creates lists of must-have home improvements and personal realization goals. She specializes in writing about home services and self-motivation.