Yes, you can lose money in residential real estate. In 1986, Kenneth and Betsy Levenson bought a house in Austin, Tex., for $116,000. Four months later, Kenneth's employer went bankrupt and he and Betsy ended up moving to Houston. It took three more years before the couple sold their Austin home -- and then they settled for $87,000, or $29,000 less than they paid.

The Levensons' travails stemmed from the collapse of oil prices, which led to a deep recession in Texas and adjoining states. Austin home prices tumbled 24%, on average, from 1986 to 1990. In several major metropolitan areas in Texas, average home prices didn't regain their former peaks for ten years or more.

Since accurate record keeping began in 1968, housing prices nationwide have never declined from one calendar year to the next. But the Federal Deposit Insurance Corp. has identified 21 regional housing busts in the U.S. since 1978 -- with the term bust defined as a decline of at least 15% over a five-year period.

Reluctant owners

Busts tend to play out over a number of years. So if you buy near the top of the market, it could be years before you break even. Price drops tend to be protracted because most homeowners are reluctant to sell at a loss. Besides, the house you occupy is a lot like a dividend-paying stock: Even if your home loses value, you can live in it rent-free. "Homeowners would rather wait out a decline than sell at lower prices," says Celia Chen, chief housing economist at Economy.com.

The Levensons tried to ride out the downturn by renting their house for a few years before finally selling. Many other homeowners in Texas simply mailed the keys to the bank. But the couple, now both 44, eventually were able to work out a repayment plan with their bank. "We decided to take the moral high ground -- and retain our good credit," says Kenneth, a commercial real estate appraiser in Houston.

The story was similar in Southern California in the early 1990s. The state's economy reeled because of a sharp cutback in defense spending that coincided with the end of the Cold War. Home prices fell 22% in Los Angeles and didn't regain their peak for four years. Prices in much of the Northeast corridor, from Boston to New York, sank in the late 1980s and early '90s -- a tortuous decline that dragged on for six years in many areas. The declines in New England and Southern California shared a common catalyst with other housing busts -- a nasty local recession. "Regional house-price declines have always been triggered by slowdowns in business activity," says Patrick Lawler, chief economist with the Office of Federal Housing Enterprise Oversight.

Lagging markets

Many, but not all, busts follow booms. Overall, the U.S. is experiencing record home-price appreciation. But the boom is uneven. Prices in many cities -- Buffalo, Cleveland and Detroit, to name a few -- have climbed little because of weak local economies. In other markets, such as Atlanta and Dallas, home building has surged but prices have not.

Therein lies a tale. The areas with the biggest price gains -- primarily California, Florida and the Northeast corridor -- are marked by strong economic conditions and a limited supply of land. Throw in low interest rates and you have the fuel for a boom. And although prices in those areas are generally higher than in the rest of the U.S., they are also much more volatile. If interest rates finally rise enough to affect home affordability, those areas would almost certainly experience the biggest price drops.

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