Why a Housing Rebound Could Take 20 Years

You know where the housing market has been. You may not want to know where it's headed.

There are tentative signs the depressed housing market may finally be close to bottoming out. That might sound like good news, but hitting bottom doesn't mean an upward rebound will follow anytime soon. Economist Celia Chen of Moody's Economy.com has published a forecast suggesting that residential real estate could take 10 years to recover in most states—and 20 years in Florida and California.

[See 10 cities facing the next real estate bust.]

Chen predicts that house prices will stop falling by the second quarter of 2010, which is consistent with what the Federal Reserve and many other forecasters have said. But her longer-term outlook helps explain why many economists are gloomy about the nation's economic prospects for the next several years. Some of Chen's predictions:

By the time house prices stop falling, they'll be down 43 percent from peak prices reached in 2006, as measured by the Case-Shiller home-price index.

That will mark the deepest housing correction since 1890, and probably ever in the United States (meaningful data go back only to the late 19th century). The prior worst housing bust was from 1916 to 1932, when house values fell 37 percent. Beating that dismal record suggests we're no smarter now than in the Great Depression.

[See 10 cities primed for a real estate recovery.]

Nationwide, price levels won't regain the peaks of 2006 until 2020. In the worst-hit states, Florida and California, the rebound will take until 2030. Five other states won't hit their 2006 peaks until after 2023. Anybody who doubts that it could take that long should consider the real estate bust in Japan, where prices are still down by half from the peaks they reached 15 years ago.

Other states, mainly those where the housing boom was muted, will bounce back faster. Homes in Texas, Oklahoma, and a handful of southern and Farm Belt states could regain peak prices within seven years, after falling by less than 10 percent. If it felt as if the housing boom was passing you by earlier this decade, count your blessings.

[See 8 industries that will sit out a recovery.]

Forecasts like this should temper some of the recent hype over the stock market rally and a dip, probably temporary, in the national unemployment rate. If housing remains as depressed as this forecast suggests, it will be extremely hard to mount the kind of recovery it will take to bring back jobs and boost consumer spending. Housing represents a huge chunk of the economy—about 16 percent—and at such depressed levels it would take runaway growth in other areas to compensate for a moribund housing market.

But that's unlikely too, since housing is also a source of much of the personal wealth that fuels consumer spending. The plunge in home values has been the major factor in the evaporation of $14 trillion of Americans' net worth, and that in turn is likely to depress spending for the foreseeable future. In past recessions, a housing rebound has been the spark that helped turn the economy around. This time, we'll need a lot of other sparks.