For the past four years, homeowners across the country have been watching their home values drop. Most have seen them drop substantially – our national Zillow Home Value Index has fallen nearly 24% since home values peaked in 2006.

But for nearly a decade before that, homeowners eagerly watched as their home values rose – sometimes by double-digit numbers from one year to the next.

While one scenario was clearly preferable to homeowners, neither was what we’d call “normal.” So, what was happening in those years? And what can we expect? Will a “normal” housing market ever return? Below, I’ll explore the causes for the run-up in home values, and the subsequent downturn, as well as explain the conditions we’re likely to see in the next several years.

• Home value appreciation between the late 1990s and the mid-2000s was an anomaly. In the eight years between 1998 and 2005, home values increased 117%, or 10.2% annually. By comparison, over the eight years prior to 1998, home values increased 12%, or 1.2% annually. Typical home value appreciation over the long-term is in the range of 2-4% per year. Generally, real estate will track or just modestly beat inflation or growth in household income.

• Why did home values increase so much from 1998-2005? There are a lot of factors that should be listed here but two key ones are the homeownership rate and the percentage of income devoted to housing costs. The percentage of households owning a home increased from 65.4% in 1997 to 69.1% in 2005. This represented more than 4 million additional households in the housing market in 2005 above the level that would have been observed had the homeownership rate stayed at 1997 levels. Not only did the percentage of households owning a home increase, but the number of households itself increased by almost 9 million over the time period. Moreover, from 1999 to 2005, the percentage of households spending more than 30% of their income on housing costs (e.g., mortgage payments, taxes, insurance and utilities) increased from 26.7% to 34.5%. The demand created by more people looking for housing and those people being willing to pay more of their income to own a home is a good start to getting higher-than-normal appreciation in real estate prices.

• Over the next 3-5 years, real estate will return lower than average rates of appreciation. This is because demand will be relatively soft given higher-than-normal unemployment (and likely higher mortgage rates) and supply will be quite high given a) already historically high levels of inventory on the market (12.5 months of supply in July); b) that the foreclosure rate will remain at elevated levels because of negative equity and unemployment; and c) lots of sidelined sellers who will be entering the marketplace in the next couple of years (some of whom will also buy, thus increasing demand, but we believe this segment of homeowners represents more supply than demand given an aging demographic). One thing that will help the demand picture is that household formation should ramp back up once the economic recovery takes firmer hold (but, again, unemployment will be key here too).

• With lower-than-average rates of appreciation in the next 3-5 years, real estate values will be fighting to keep pace with inflation, which will gradually return to the range of 2-3% per year. This means that in real terms (subtracting inflation rates), there may not be very much appreciation in home values over this time frame.

• Now that the real estate boom is over, people should return to thinking about their home more as a savings account versus a stock market investment. Or, a home simply as a place to live. Does this mean that housing is not a good investment? Not at all. Among other things, a home mortgage is a forced savings plan that can lead to substantial cumulative savings over the long-term. Moreover, in a typical housing market in which appreciation roughly tracks inflation, a homeowner is not only getting increased equity by paying down their mortgage, but they are also getting the utility of a place in which to live over which they have ultimate control – no 30-day notice to vacate, no restrictions on which color to paint the bedrooms or whether you can have a pet. In addition, in many markets around the country, home values have been reset so much during the housing recession that buying looks quite attractive relative to renting right now. While conventional wisdom holds that buying will usually make more sense than renting if the homeowner plans to stay in the home for at least five years, this time horizon is currently much lower in many markets, meaning that buying beats out renting much sooner.

• While making good economic sense for lots of buyers, homeownership doesn’t make sense for everybody. People who have a short-time horizon for living in a particular home, value mobility, have uncertain future income, or for whom housing costs associated with a purchase would make up too much of their monthly income, might prefer to rent. It is clear that the decision between renting and owning is becoming more of an economic decision to many Americans, informed by their particular circumstances, as opposed to either an emotional one or a decision made out of mere social convention. And, in the end, that’s probably a good thing, whatever decision they ultimately make.