The housing bubble pops in Central Indiana. How devastating was it? Housing, in “normal” times, wants to appreciate at around 3% per year. It might deviate above or below that, but in the long run, that’s what one should expect. Most economists will say that the bubble started sometime in the second half of 2002. That’s about right. The economy had just come out of a recession caused by the technology stock bubble of the late 1990′s. Here is a bit about it from a great book, Crash Boom!, by OwnAmerica founder, Greg Rand:
You might expect that financial disaster to have a negative impact on housing, but housing was quiet for the entire preceding decade. Housing was due for a boom, and the tech stock bubble actually lit the fuse. …the tech stock bubble was not just a correction in values on Wall Street. It was evidence of wild-eyed volatility on Wall Street. For years leading up to that event, online trading firms had been enabling millions of amateur investors to trade on their own accounts. Why do you think so many companies with little revenues and no profits were able to have their stock prices driven up so high? Because the amateurs were evaluating stocks based on the sex appeal of their story, not on their price-earning ratio. And the professionals were encouraging them to do it.
The tech stock bubble drove investors away from Wall Street and right into the arms of the housing market, where great values and lifestyles could be found.
Couple that with over-development, loose lending practices and buyer exuberance, and the market was stretched way beyond the norm. It could do nothing other than snap back with a correction.
On the chart above, you can see National, Midwest and local median home prices going back to 1969 (median data from MIBOR is only available back to 1999. I had to do some extrapolating to get numbers back as far as 1989).
Going back in time four decades shows just how steady an investment housing is. The bubble is easily seen nationally as well as regionally. Then we get to Metropolitan Indianapolis (MIBOR area). As you can see, there really wasn’t a bubble here; but it was overall so large nationally that it was nearly impossible to be immune from the correction, even here in Indiana. One can even argue that the result of being caught up in the correction is that median home prices are actually suffered more here than in the rest of the Midwest or nation, giving back (as of 2011) a 11 years worth of value. The Midwest is back to 2001 levels and the nation overall is back to 2002 levels.
Where does this all lead? It will be interesting to see if we are done correcting, back on the upswing or just leveling off for awhile. Regardless, it will happen. Housing always goes through cycles like this:
- Cycle begins at a low point.
- Market appreciates as demand grows.
- Market cools off because prices rise too high, and the economic climate worsens.
- Market corrects when sales slow down and sellers eventually capitulate.
- Market levels off as demand comes up to meet the new price levels. Market remains level until the economy accelerates again.
- Cycle is complete.
I think we are somewhere between 4 and 5. So, the housing bubble pops in Central Indiana. The good news is that homes in Central Indiana are ridiculously affordable. If ever there was a time to jump into the market as a home buyer or investor, I think this could be it.
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