Lately I've been getting that déjà vu feeling. If you lived in Texas through the S&L debacle of the late ‘80s, you probably have too. If you didn't, listen up. What happened to houses in Texas back then may be the template for what happens across the country as the housing bubble pops today.

Many of the circumstances are similar. Consider this list:

• A boom environment. Back then, Texas had been in a long building boom fueled by rising oil prices. Housing prices had risen nicely for years. Many Texans who had started with next to nothing were enjoying a new feeling of wealth as they moved from one appreciating house to another. Today, home prices across the country have been rising handsomely for years, creating unexpected wealth for millions of homeowners.
• Finance frenzy. Back then, the savings and loans were encouraged by changed accounting rules to make big development loans, booking unearned profits. Today, Wall Street has built the perfect pipeline of profits from lending money to selling securitized loans to European and Asian bag holders. In both cases, someone else would pay the price for bad loans, the FDIC then or investors today.
• Down payments. Back then, Texas home buyers were advised to put as little as possible down because Texas laws prohibited borrowing equity out of your house. So many put only 5 percent down--- an amount that would be wiped out by selling costs. Today, we've been through a long period of lax financing. The Nitwit Sector (lending) has rushed to provide 100 percent financing to people with no history of debt repayment.
• Low interest rates. Back then, builders marketed houses by "buying down" mortgage interest rates for a year or two. After that, the interest rate and monthly payment rose. Many saw their payments rise as the value of their houses fell. Today, adjustable loans start with "teaser" rates that reset much higher in a year or two. New owners are seeing their payments rise as their home value falls.
• Employment. Back then, construction employment loomed large in Texas. So did employment in finance and banking. Today, construction workers are leaving Florida and other boom areas because construction is coming to a halt. Mortgage brokers are losing their jobs across the country.

To track the consequences, I went to the website for the Office of Federal Housing Enterprise Oversight, otherwise known as OFHEO. There I examined the indexes of housing prices. The indexes are particularly valuable because (1) they track only houses purchased with conforming (under $417,000) loans, and (2) they track same property transactions. They provide a good measure of the paycheck homebuyer economy, and they aren't bent by sudden infusions of dramatically more expensive houses. Also, they track only single-family home prices, not condos.

While the national index figures reflect the illusion we most favor--- a steady and virtually guaranteed rise in home prices--- a very different picture emerges when you examine price indexes by state or metropolitan area. Here are some examples.

• Houston, the first Texas city to fall in the oil bust, had its home price index peak at 108.5 in 1983. It also bottomed early, hitting 81.5 in 1987. But it was a long bottom--- the index didn't recover to its 1983 level until 1997. So recovery from the market top took all of 14 years.
• San Antonio peaked in 1984 at 109.7, didn't bottom out until it hit 82.5 in 1990, and didn't recover to its old high until 1995, a period of 11 years.
• Austin peaked in 1986 at 100.1, falling to 72.7 in 1991, and reaching recovery in 1994, about 8 years.
• Dallas also peaked in 1986 at 110.1, bottomed at 94.3 in 1989, and regained its old peak in 1997, a period of 11 years.

The Texas template tells us we could be in for a 14 to 25 percent decline and an 8 year to 14 year wait for recovery. That's real history. It's not hyperventilation from the Chicken Little chorus.

You should also know that big-time housing comedowns aren't unique to Texas. Comedowns also hit other markets. It happened in La-La Land. Los Angeles peaked in 1990, bottomed in 1995, and wasn't fully recovered until 2000. And it happened in Beantown.  Boston peaked in 1988, bottomed in 1992, and hit its recovery number in 1997.

Bottom line: Love your house for the shelter and peace it provides.


Sidebar:

How Are Houses in Your Area Doing Versus Inflation?

Here's how to see how houses in your area are doing relative to inflation. First, visit the OFHEO website and download the residential data file for metropolitan areas. Open the file and pick a date that means something to you, like when you purchased. Write down the index number. Scroll down the listing until you get to the most recent quarter. Write down that index number.

Now, go to the inflation calculator on the website of the Minneapolis Federal Reserve Bank. Enter the year and first index number you selected. Hit "calculate." The new number in the bottom box is the index number your area would have to hit if home prices were to keep up with inflation.

Here are two examples. The Nashville area home price index was 75.39 in 1986, and it is 188.52 currently. If the 1986 index number kept up with inflation, it would now be 141.36, so Nashville housing is doing better than inflation.

Dallas, on the other hand, was 110.9 in 1986 and is only 167.37 today. To have kept up with inflation, its index number would need to be 206.49. So Dallas housing has trailed inflation.

On the web:

OFHEO price index data for download:

Minneapolis Federal Reserve Bank inflation calculator:

OFHEO page of links to other residential real estate data:

Read “The Nitwit Sector” on my website:

Read “A Tale of Two Transactions” (and lots of reader comments) on my website:

The Housing Bubble Blog:

Paper Money blog:

The Bubble Times: