How the Bay Area Bounced Back From the Dot-Com Bust
- Between May 2001 and January 2002 – the dot-com bust – the median home value nationwide increased by 3.3 percent.
- Over the same period, home values fell by 7.5 percent in San Jose and 0.7 percent in San Francisco, two tech hot spots.
- In the Bay Area, lower-valued homes experienced a less-severe drop in value and a faster recovery during the dot-com bust and recovery than mid-level and top-tier homes.
It took ten long years for the median U.S. home value to return to its bubble-era peak, a milestone it finally reached this spring. For a quick comparison, we looked at how long it took two hard-hit Bay Area markets to recover following the dot-com bust in the early 2000s. The short answer: The recovery from the dot-com hit was a lot faster.
In March 2001, the U.S. economy entered what proved to be a relatively short-lived recession. It is widely believed to have been the result of a series of Federal Reserve interest rate hikes, which sent the federal funds rate target from 4.75 percent in June 1999 to 6.5 percent by May 2000. This led to a revaluation of asset prices, including stock markets, which some market participants believed had become overvalued during the dot-com bubble of the late 1990s.
The residential real estate market held steady, for the most part. Between May 2001 and January 2002, the median home value nationwide increased by 3.3 percent – a healthy pace of appreciation. But home values did drop in the two markets with the most direct exposure to tech employers adversely affected by the dot-com bust: By 7.5 percent in San Jose and by 0.7 percent in San Francisco
Overall, higher-priced homes experienced a larger and more sustained drop. Home values in the top third of the market fell 9.5 percent in San Jose and by 3.8 percent in San Francisco between May 2001 and January 2002. Home values in the bottom third fell 3.8 percent in San Jose, and actually increased by 4.8 percent in San Francisco.
In San Francisco, it took the median home 11 months, until March 2002, to climb back to its pre-bust value. For higher-end homes, the wait was longer: They didn’t recover to their pre-bust peak until August 2002, a 15-month wait. In San Jose, the recovery was even more drawn out. It took the median home there a full 28 months, until September 2003, to recover to its pre-bust level; higher-end homes took 35 months, until April 2004, to fully recover. The most affordable San Jose homes recovered to their pre-recession levels within a year, by May 2002.
For concerned Bay Area homeowners or home shoppers who see echoes of the early 2000s in today’s stock market and looming Federal Reserve rate hikes, there is perhaps a clear lesson: Homes priced toward the bottom end of the market offer less risk and are likely to recovery more quickly if the area’s housing market temporarily declines.
For the rest of us, another lesson: All market declines are not created equal. Even 35 months doesn’t seem like a long recovery when the alternative is a decade.
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