A housing bubble can sometimes fizzle out

“Mailbag” offers insight into comments and emails I get from my readers — good, bad or in-between — and my thoughts about their feedback.

INBOX >> A local banker asked a great question about my frequent five-bubble alarms regarding homeprice stability.

“Some bubbles just fizzle and don't burst, right? What do you think this bubble will do?” he wrote. “Seems a fizzle is most likely with annualized house inflation of 2-3% for a few years — seems healthy, which could be a nice breather?”

MY REPLY >> I love the banker's “fizzle” phrase. And yes, a lengthy period of tiny gains is a possible “best case” outcome following what appears to be significant overpayment for housing in the past year.

The late 1980s housing bubble ended in California with what you might call a fizzle after prices more than doubled in the decade. The 1990s started with an extended period of modest price dips followed by a slow rebound.

Those gyrations put eight years between price peaks for California while prices elsewhere in the U.S. ran at below-average gains.

But we can further explore a bubble's fizzle with help from my trusty spreadsheet, which reviewed 47 years' worth of the Federal Housing Finance Agency's “all-transactions” price report. It's a curious price index that combines sales results as well as valuations gleaned from appraisals on refinanced mortgages bought by government-support agencies.

Status quo

First, ponder the 2022 market. In the four quarters ended in March, California home price gains ranked 16th among the states at 20.7% vs. 17.5% nationwide.

The top three states included Arizona at 28.6%, followed by Utah and Idaho. The low was Washington, D.C., at 10.1%, then North Dakota and Louisiana.

How crazy is this? All the states plus the District of Columbia had double-digit gains at the same time for the first time in 47 years of FHFA data.

At the start of 2021, there were just five states, and before that, the highest double-digit count was 43 states back in 1979.

The sizzle

The wild start of 2022 makes me think home-price jumps of 10% or more are “sizzle” — a worthy wordplay on the banker's “fizzle” concept.

How common is housing sizzle?

When you look at all the states over 47 years there were 9,435 quarters with 12-month results. States had 1,562 quarters with one-year price gains of 10% or more.

So history says U.S. housing sizzle happened 16% of the time.

By similar math, California ranked No. 1 for its sizzle with double-digit gains 37% of the time since 1975.

Other sizzling states included D.C. at 32% and Massachusetts at 31%.

But these double-digit upswings were rarest in Georgia at 5% and Alabama at 6%.

The bursts

Let's classify any 12-month period with declining prices as a “burst” — no matter the size of the drop.

Why? Price declines occurred only 16% of the time nationally. Strikingly, that's the same as the sizzle periods.

Of course, California is a relative outlier. One year of losses were seen 25% of the time, ranking the Golden State fourth for frequent price dips.

Connecticut has the most bursts with dips happening 33% of the time, followed by Rhode Island and New Hampshire.

Least likely to be down? Kentucky, Iowa and North Carolina at 9%.

The fizzles

Pricing's extremes may be etched in our real estate memory banks. Yet history tells us they're fairly uncommon nationally.

Consider that prices in all the states were neither sizzling (up 10% or more) or bursting (any decline) in two-thirds of all year-long time frames since 1975.

And the median for one-year price changes in all the states is a modest 4.26% gain over 47 years.

So I'll define fizzle as any 12 months with a gain below the median appreciation rate. And it's been a fizzle for U.S. prices in 33% of all yearlong time frames since 1975.

That's a market condition seen roughly twice as often as any 12-month decline — you know, a burst.

Please note: California isn't fizzle-friendly.

It ranked last for these thin gains as fizzle happened only 12% of the time since 1975. That's half as often as California bursts into price declines.

States most likely to fizzle were topped by Arkansas at 54% of the time since 1975, then came Iowa, West Virginia, Indiana, Nebraska and Oklahoma.

After California, fizzles are rarest in Massachusetts, Rhode Island, Arizona and Oregon.

Nice breather?

Try to look at California housing's history of hyperventilations this way.

The good news for homeowners — and the bankers who do business with them — is that they've often been rewarded for living with intense homeprice gyrations.

Since 1975, this California price index rose at a 6.7% annualized pace.

That loosely translates to a $38,000 house circa Ronald Reagan's last year as governor growing in nearly a half-century to an $800,000 value today.

Equally noteworthy, is that this rate of appreciation is second-best in the nation. U.S. gains ran 4.6% over 47 years.

No. 1 was D.C. at 6.9%, and right after California came Washington, Massachusetts and Oregon.

The smallest gains were in Mississippi at 3.3%, then came West Virginia, Arkansas, Alabama and Ohio.

As for California's main economic rivals, Texas appreciation ranked 26th nationally since 1975 with 4.6% gains while Florida was sixteenth at 5.1%.