by Guest Author Michael David White. Bio follows article.
Economist Paul Dales at Capital Economics calls the Great Depression fall in housing prices a loss of 31% (MarketWatch). How bad was it then? The post-depression turnaround to re-attain the bubble high took 19-years.
That means if we start today and our rebound mimics the Great Depression, we are good and back to normal in 2030. Which raises the obvious question: Will we be alive?
On the bright side: Dales says housing is currently undervalued by 24%.Barry Ritholtz calls the greater-than-the-depression call unjustified. Says Case-Shiller uses hypothesized data for the Great Depression. He throws out baby and bath water and mentions new home sales have fallen 82% in our cycle versus 80% in 1929-33. The other Great Depression falls: GDP fell 30 PERCENT. Peak-to-trough Dow crashed 89 PERCENT. Wow. “Banks were failing by the 1000s.” I’m starting to believe Barry.
A point against him: Our current bubble was radically greater than any previous bubble (If you believe the hypothesized Case-Shiller numbers, and I do.). That would mean we could fall much further.
Ritholtz mentions a cause of the difference between the two periods. Mortgages back then were 3-to-5 year loans, not 30 years. He seems to suggest the short loans favored a greater fall in prices.
The opposite is true. Our current gargantuan loan periods allow the same income to pay a ton more for a house. Thus did the Affordable Homes’ geniuses crank up the price of real estate by creating the 30-year mortgage.
Ritholtz has hard numbers on real estate prices in a study of Manhattan from 1920 to 1939. The fall in prices? 67%.
If they were far less leveraged back then, then our fall in prices should logically be greater. Some say it already is (see first paragraph). Check out our Case-Shiller chart immediately below showing a fall in prices of 37%.
June 1 Core Logic reported a gain in prices of 0.7% in April. This is the first gain following the home-buyer tax credit expiration in mid-2010 according to Calculated Risk. The same report shows a price fall of 7.5% over the year from April 2010.
Stephen Meister at the New York Post reports the following price-reducing trend: “The economy still isn’t producing enough jobs to keep up with the growing workforce. So people are reluctant to become first-time homebuyers because they’ve lost (or fear losing) their jobs, and because they fear further price drops. That means “trade-up” buyers can’t buy — even if their jobs are secure — because there’s no one to buy their current (starter) homes at a price that will pay off their mortgages.”
Editor’s note: The statement from Barry Ritholtz that banks failed by the thousands in the Great Depression, while true, is a misleading comparison to the financial crisis of the 2000s. From a 2009 review:
There were 10,000 bank failures in the Great Depression, but few of them had branches.
Today, a medium sized bank usually has hundreds of branches and the two big failures, Washington Mutual and Wachovia Bank had more than 8,000 branches between them.
Thus, the number of actual bank locations affected in the current crisis, which is not over, is similar to the entire period of the Great Depression from 1929 to 1941.
In 2011 there have been several hundred more bank failures, many with multiple branches, so the number of failed bank “store fronts” now easily exceeds the total for the13 year duration of the previous crisis. And the current crisis is less than three years old.
In dollar terms, per capita and adjusted for inflation, the 2000’s financial crisis magnitude is more than 28x the size of the 1930’s crisis. See Related Articles by John Lounsbury.
Related Articles
Spring 2011 Guide to 30 Key Charts to See beforeYou Buy or Sell Your Home by Michael David White (at Housing Story)
Housing Market Recovery Undermined by Seriously Delinquent Homeowners by Keith Jurow
Case-Shiller Joins the Club – All Indices in Double Dip Territory by Steven Hansen
April 2011 Pending Home Sales Signals Disaster in Home Market by Steven Hansen
Banking Crisis Dwarfs the Great Depression by John Lounsbury (at TheStreet.com)
Comparing Today’s Banking Crisis to the Past by John Lounsbury (at Seeking Alpha)
Coming Soon: Banking Crisis of Historic Proportions by John Lounsbury (at Seeking Alpha)
Michael David White has 19 years in real estate as lender, owner, mortgage originator. He is currently loan officer at a Chicago area federal credit union and the editor of Housing Story.net. Mike is frequently quoted by major media, such as Bloomberg, CNBC and The Huffington Post. See Linked In for full resume.
