The press and the investment community have made much of the good news on housing lately. Certainly the recent upturn in sales, construction and real estate prices is welcome. But if the 1980s housing bust is any guide, popular references to the sector's strength and imminent recovery grossly overstate the case. The 1980s experience suggests housing will recover only slowly. Residential real estate may well have turned a corner, but major gains and price recovery will likely wait for some time.

Though the housing boom of the 1970s and subsequent bust in the 1980s had different roots than the more recent experience, their pattern is instructive nonetheless.  Back then, the housing surge grew out of the great inflation for which the period is famous. Consumer prices were rising at double-digit annual rates, depressing the value of all financial assets and driving Americans toward real assets, especially real estate. Their buying binge pushed home prices up rapidly, creating, in the process, a greater incentive for people to buy still more. When the Federal Reserve, under Chairman Paul Volcker, took sudden, radical action in 1982 to stem the inflationary tide, the whole structure collapsed. The increase in interest rates engineered by the Fed at first starved homebuyers of credit, but as the Fed began to prevail against inflation, the whole reason for the bias toward real estate investments evaporated.

The associated bust in home buying, building and prices was shocking. In the first year after the 1982-83 peak, purchases of new and existing homes fell almost 20%. Home building carried on a little longer, but by 1984 it had slumped almost 30% from its highs. The median price of a home in the United States fell some 5% in 1984, a minor adjustment by more recent standards, but, in an environment of still high inflation, that amounted to a real loss closer to 9% to 10%.