2004-2014: Housing's 'Lost Decade'

TRUCKEE, CA—Housing prices generally have returned to levels seen in 2004, but what about the pricing achieved in the years that followed? Those peaks have largely disappeared in what Clear Capital calls the “lost decade” for the US housing market.

“We're back to '04 levels without even accounting for inflation, leaving many homeowners with no more equity than when they bought,” the Truckee, CA-based data provider says in its newly issued Home Data Index Market Report. “This is unusual in the history of the housing market where prices have risen 55% over each rolling 10 year period since 1985.”

That lost decade is shaping up to a lost decade-plus. Clear Capital expects continued moderation in home prices, with just 1.8% projected through the company's revised 2015 forecast.

Over the next 12 months, we could see this moderation have an impact in a variety of areas, “not least of which is consumer confidence,” Alex Villacorta, VP of research and analytics at Clear Capital, tells GlobeSt.com. For one thing, homeownership entails quite a few expenditures beyond just buying the home, ranging from relocation services to shopping—or not shopping—at home-improvement retailers.

“If that remains stagnant, then that's a large driver of consumer spending that will likely be missing from the broader economic picture as well as for a lot of the homebuilders themselves: if people aren't buying homes in general, they're certainly not going to be buying new homes,” says Villacorta. “There are a lot of far-reaching effects, but one of the main ones will be the confidence in the overall economy. If wage growth isn't there, if job growth isn't there and now home price growth isn't there,” then that will make many would-be buyers wary about a 30-year commitment to buying a home.

Two notable exceptions to the rule are Honolulu and Denver, and with dissimilar recent histories both have escaped a lost decade. Prices in Denver are now 10.6% above '04 levels, and prices in Honolulu are 70.3% higher than a decade ago and 14.3% above their peak.

In the case of Denver, it's a matter of slow and steady gains seens during the bubble years and a stronger local economy that withstood the forces of the bubble bursting. Although Honolulu home prices rose rapidly during the bubble, they were granted some resilience by having limited supply in a destination location with high demand. “On an island, there's only so much room to build new homes,” Villacorta points out.

In general, however, Clear Capital thinks the “lost decade” could drag out longer due to fewer discounted distressed deals limiting investor demand and hesitation from non-investor and move-up homebuyers. For now, national yearly home price growth of 8% is still double historical averages.

“As we brace ourselves for price moderation for the immediate future, the risk of price volatility could damage homebuyer perception, preventing markets from seeing the stable growth of Denver and Honolulu,” according to Clear Capital. “In addition to the obvious drivers of job and wage growth, we need slow and steady price growth to help support the perception of a healthy housing market among homebuyers. The market must find equal footing before we're well into a second lost decade.”