A recent report written under the auspices of the Federal Deposit Insurance Corporation (FDIC,) suggests some interesting analysis of the current housing situation, namely that booms and busts are difficult to quantify.

"U.S. Home Prices: Does Bust Always Follow Boom?" delves into the housing price boom which have risen almost 50 percent over the last five years, nationally, 13 percent in 2004, surpassing any increase in the last 25 years.

"Because of this rapid growth, some have become concerned about the possibility of a home price collapse, either nationwide or in a number of major cities," says the report. "What can history tell us about the likelihood of "booms" to go "bust?"

Defining a "boom" as a 30 percent or greater increase in inflation-adjusted (or real) home prices during any three-year period, the FDIC adjusts the "nominal home price series that is published by Office of Federal Housing Enterprise Oversight (OFHEO) using the Bureau of Labor Statistics consumer price index (CPI) less the price of shelter, which is used by OFHEO to adjust home price changes for inflation."

A "bust" is simply a reverse of the criteria - 30 percent declines or greater within a three-year period. However, the FDIC cautions that this guideline might be too strident as the same period only identifies five metro-are busts since 1978. A more reasonable guideline, it notes, would be an "average decline in nominal home prices of at least 15 percent over five years, or a nominal "15 in 5" rule.

Putting the current boom in a historical context, the FDIC makes it immediately obvious why this one's different, using the "1/3 in 3" rule, and the "15 in 5" rule for declines.

Since 1978, 63 different U.S. metropolitan areas have experienced at least one boom, and 24 cities have experienced more than one, with a concentration in California and the Northeast or 70 percent of the 63 markets. Conversely, 142 metro areas (where the average home price, adjusted for inflation,) have declined by at least 15 percent over a five-year period.

Here, the FDIC begins to second-guess itself? Is the "15 in 5" guideline too lenient, resulting in too many cities being identified as declining? "After all, what we are really saying is that the value of the average owner's home in these 142 metro areas simply failed to keep up with inflation during the five-year period and fell behind inflation by at least 15 percent," reasons the researchers. "The price of their home in nominal terms may never have fallen at all. For example, the five-year change in the CPI less shelter index between 1978 and 1982 was 43 percent. A city such as Akron, Ohio, where homeowners saw the value of their homes rise by 12 percent during this period, would nonetheless be placed in the "bust" column under a "15 in 5" definition based on changes in real home prices."

The report goes on to explain that a period of "true distress" for homeowners and lenders might be better defined in terms of a large decline in nominal prices that push the value of properties below what homeowners owe on their mortgages. "If homeowners had no choice but to sell in this type of situation, they could be forced to bring a sizeable personal check to the closing," says the report. "Such a large decline in nominal home values would reduce the incentive of homeowners to repay their mortgages to protect their equity stake, since equity tends to evaporate with a decline in prices. This is why we feel that a better measure of distress in metro-area housing markets would be to define a bust as an average decline in nominal home prices of at least 15 percent over five years, or a nominal "15 in 5" rule.

"Using our criteria, some 21 cities can be defined as having experienced a housing bust at some point during the past 25 years," says the report. These areas would include the "oil patch" cities of Texas, Oklahoma and Louisiana in the mid-1980s, the Northeast and California in the early 1990s, and Honolulu in the late 1990s through 2001.

Of course, the question on everyone's mind is 'are we going to have a housing bust?' Not likely, without a catastrophic economic event, suggests the report.

Most U.S. cities have demonstrated fairly stable home price trends over time," notes the report, with only 20 percent of 361 cities experiencing either a boom or a bust.

Prior to 1998, 46 cities experienced home price booms, with only 21 instances of home price busts. "In just 9 of 54 unique boom episodes prior to 1998, or roughly 17 percent of all such events, did a bust subsequently occur within a five-year window," says the report, suggesting that stagnation in home prices is a more likely outcome of booms than busts. "Of the 54 boom episodes prior to 1998, 45 did not see a subsequent bust."