“Worse than the Great Depression!”
That seems to be the rallying cry of every media outlet over the past few days. While it makes for sensationalistic headlines, it is not true. At least, we do not have data that proves it is — or isn’t — true. Let’s take a closer look at this.
To begin, let’s start with 3 facts about Housing data:
1. There is little reliable data about National Home Prices in the 1930s. The NAR data only goes back to 1969, and the US Government data from that era covers new home construction, not existing home sales.
2. The closest thing we have to national prices is the S&P/Case Shiller Index. The Index, which uses repeat home sales pricing, originated in the 1980s.
The Case Shiller chart showing home prices in the 1920s or 30s does not use actual sales data, but are hypothesized by Prof Shiller in his book Irrational Exuberence. (Historical data for the CS index only goes back to January 1987). Charts, such as this one, are based not on actual, sales prices, but on theoretical ones, and as such should be taken with a grain of salt.
3. The one data point we do know is the sales volume of New Homes. It has fallen 82% this cycle versus falling 80% over the 1929-33 era.
That one measure covering less than 15% of all home sales, is worse today. However, ostensibly drawing a broad conclusion based upon this single metric is ill advised.
How does the Great Recession compare to the Great Depression? Some data points we have:
1. Home ownership in 1930 was 47.8% versus 66.2% in 2000, and near 70% in 2006. (Census Bureau)
2. Unemployment was 25% at its Depression peak; the 2007-09 Recession never saw U3 Unemployment get over 12%. (BLS)
3. GDP lost 30% in the Great Depression; During the Great Recession, we lost 6% of GDP. (BEA)
4. Following the 1929 crash, broad stock market losses were more than 75% (Peak to trough Dow losses were 89%). 2007-09 stock losses were 50-57%.
5. Industrial production, which plummeted 75% around the 1929 Crash, has actually thrived during the Great Recession. Fed action and a weak dollar has helped US Manufacturers.
Both the Housing markets and available financing were widely different, then versus now. Beyond the lower Home ownership levels (66.2% vs 47.8%), ownership was more concentrated amongst higher income and wealthy than the more broad-based ownership we have today. And many more people lived on family-run, family owned farms early in the 20th century than today.
Additionally, more homes were owned outright — without any mortgage — in the 1930s versus today. I have to track down the data, but I recall that over 70% of homes in the 1920s had no mortgage versus about 40% today.
But the biggest and most important difference was financing: Mortgages were 3 to 5 year, interest only, with a balloon payment of the amount borrowed at the end. After that 3-5 year period, you either re-signed with the bank, or sold the land and paid off the note. There was no such thing as a 30 year fixed rate mortgage in the 1920s or ’30s.
THAT financing arrangement would have had a huge impact on prices. Banks were failing by the 1000s; even someone with the means to roll their mortgage over might have foudn the bank did not have the ability to do so. With few buyers and almost no credit, the odds favor that RE prices would fall quite substantially.
How much? One study of Manhattan (Estate Prices During the Roaring Twenties and the Great Depression) that looked at market-based transactions home prices between 1920 and 1939 found that Home prices plummeted 67% during the great depression.
Yes, home prices are bad. They are nearing the 35% drop we forecast back in 2005. But worse than the Great Depression? I don’t think so . . .
Never let the facts get in the way of a good narrative!
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
We have a structural problem in housing (pardon the pun).
The problem is that the true value of RE, generally, is unknown. Thanks to twisted and dishonest GAAPs and the ability of our banks to move bad RE "assets" to the national balance sheet and to "borrow" money at negative interest rates, there has been no straightforward price adjustment or discovery. It's being avoided like the plague, because it is the plague. The overhang of inventory and the sheer volume of underwater mortgages are a symptoms of this defect.
Is it worse than the '30s? Until it gets better (and it won't get better until price discovery is allowed), there's no way of knowing.
Petey Wheatstraw Says: June 1st, 2011 at 8:27 am
Is it worse than the '30s? Until it gets better (and it won't get better until price discovery is allowed), there's no way of knowing.
reply: ——— During normal times, owning is cheaper than renting because you will get back your investment when you sell, causing the rent to be free. Granted, these are not normal times and the mortgage is a ball and chain if you bought at the wrong time.
I know that deflationista talk is not in fashion, but, ultimately, this is the fate awaiting us. The Fed and its QE initiatives will delay this end and provide much profit for the astute along the way. But prices falling to income levels is our future since it appears impossible that incomes will ever rise to prices at any time in the near or far future. So, imagine a time and place where the cost of the commodities are a reasonable function of scarcity and income, and the building codes allow innovative, low cost, and desirable homes. This evolution does not even consider changes in taste and preference that would naturally cost less even if today’s standards were applied.
I suspect housing in 10 years will have a very different look from housing today. Lower prices. Different styles. Construction that relies less on scarce commodities, which will cost less because they aren’t being hyped by monetary inflation. Yes, commodities will eventually cost more due to supply and demand for the commodity, but today, it’s all monetary policy combined with skillful speculators that function as middlemen but add no value, combined with the support of inept and corrupt regulators. Someday, smart people will figure out how to bypass the speculators and the speculator tax by devising new techniques that use more common materials, but, unfortunately, that is still 10+ years away. Plan to bend over and take it until then.
Due to future deflation, housing will continue to fall, but, prior to the deflation, prices will continue to fall due to the crappy economy and the speculator tax that appears to finally be institutionalized and permanent.
WTF?? “2. Unemployment was 25% at its Depression peak; the 2007-09 Recession never saw unemployment get over 12%. (BLS)” BLS IS BS! Unemployment is 22% [Shadow Statistics]. THIS IS A DEPRESSION.
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BR: Thank you for your cool, rational, unemotional analysis of the NFP data using impeccable sources.
With your disposition, you most certainly are a fine investor . . .
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davossherman@gmail.com Says: June 1st, 2011 at 9:11 am
WTF??
THIS IS A DEPRESSION.
reply: ————- Yes, but I will probably make a lot of money on my bond fund today. The smart money is buying now. The stocktards will buy in July and feed the kitty until September. If NFP is in line with ADP and if new claims support the sick economy story, then I’ll double down. With luck, I’ll make from 5% to 15% of free money in capital gains by Sept or so.
Various trends over past years related to household income and household formation have worked together to excessively and unsustainably force up property prices to unfair levels. These factors are combined with unchecked commodification of shelter for the population.
This is caused by misguided governments who omit to regulate house prices, while unfairly allowing over-leveraged bidders to force up housing costs so they, the government, can benefit from vast streams of land tax, stamp duty, and council rates revenue.
Australia’s dangerously unregulated property environment includes many unfair elements such as Negative gearing that is well described on AustralianPropertyForum.com…
Negative Gearing http://australianpropertyforum.com/topic/8489333
Sadly the truth is that every spare dollar of household income is spent on overpriced housing and capitalized into ever increasing house prices as young families battle for decent shelter while speculators unfairly hoard the available housing stock! Quite unfair really. Meanwhile Auction Clearance Rates are being manipulated by crooked real estate agents…
Auction Clearance Rates http://australianpropertyforum.com/topic/8476676
Make no mistake, the Property Bubble is doomed!
Cheers, Max, Housing Bubble Forum
http://australianpropertyforum.com/topic/8501013
who cares? higher food prices, no savings rate, and falling asset prices (all houseowners circa 2003-07) is depressing. It was caused by all associated with “lax” mortgage underwriting and regulation. safe and sound banking? prosecute the bastards and all that defend them.
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