“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!

Category: Data Analysis, Real Estate, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

46 Responses to “Is Residential Real Estate Worse than During Depression?”

  1. Petey Wheatstraw says:

    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.

  2. dead hobo says:

    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.

  3. davossherman@gmail.com says:

    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.

    ~~~

    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 . . .

  4. dead hobo says:

    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.

  5. Revert2Mean says:

    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

  6. rfullem says:

    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.

    ~~~

    BR: Those of us who are introduced in facts and data care.

  7. ilsm says:

    It is not nearly as bad as when the US used resolution trust…………………………………..

  8. constantnormal says:

    A pair of quibbles … One minor and one major …

    (minor) when BR compares “unemployment” rates between the 1930s and the present, he is comparing apples and orange crates. Perhaps if he were to use the U6 rate rather than the restrictive (and nearly meaningless) U3 rate, it would look a bit less lop-sided, but the scales tip back in his favor when one considers the social safety nets in place between then and now. Even if today’s U3 rates were at 30%, I think that we would still be better off than the folks were during the GD, because webhave unemployment insurance and they did not. There’s a HUGE difference between going from some income to a lesser income and going from some income to ZERO income.

    (major) it is simply foolish to compare the Great Depression to the current whatever-you-want-to-call-it, simply because our current mess IS AN ONGOING SITUATION. Regardless of what the “official” start and end dates of the collapse that began in 2007 are, the fact remains that unemployment remains comparable to the worst levels of the average post-GD recession, that housing is still in a continuing decline, capacity utilization remains weak, and that the incomes of the middle class (which continues to be under stress) remain stagnant. Plus, the situation in the global economy is also a very troubled picture, and could easily devolve into something similar to the trade wars of the 1930s. If we were to calculate a distribution of the intervals between recessions in the past, it seems a near-certainty that we will enter the next “official” recession long before we have come anywhere close to recovering from the hurt we are currently experiencing. One could easily draw the analogy between our current “recovery” and the recovery in the early 1930s, before the rest of that story unfolded. Please wait until this story is over before you start the comparisons.

    End of quibbles.

  9. Yes, it is an Apples and Orange comparison.

    There were no under employed part time workers then — and the % of married female workers were significantly lower.

  10. Mark A. Sadowski says:

    There’s a couple of problems with this post.

    1) You’re conflating the claim that residential housing has done worse with the claim that this recession is as bad as the Great Depression. These are two seperate claims and one does not imply the other.

    2) The relative absence of mortgages in the Great Depression would have greatly reduced the foreclosure problem relative to our own times.

    3) High end real estate in Manhattan in the 1930s was not a proxy for housing nationally.

    Grebler, Blank and Winnick constructed a fairly decent index of nominal housing prices nationally (Shiller uses it). It fell 30.5% from 1925 to 1933.

    http://www.nber.org/books/greb56-1

    In contrast the S&P/Case-Shiller index has fallen 34.0% from 2006Q2 through 2010Q4.

    Moreover your claim ignores the fact that there was considerable deflation in everything during the Great Depression. Taking into account the CPI, real housing prices only fell 12.6% from 1925 through 1932. In contrast real housing prices have fallen 40.1% this time around (so far).

    P.S. For comparisons sake on the 67% decline in housing prices in Manhatten between 1929Q3 and the end of 1932, consider the city of Las Vegas today. From peak in April 2006 to present housing prices in Las Vegas have fallen 58.4%. Adjusting for CPI the decline in housing prices in Manhatten in the early 1930s is 57% whereas the decline in Las Vegas today it is 62.7% (so far).

  11. Mike C says:

    During normal times, owning is cheaper than renting because you will get back your investment when you sell,causing the rent to be free.

    Causing the rent to be free?

    This isn’t the correct way to analyze the issue. Generally speaking, the ALL-IN monthly cost of owning a house (mortgage payment, property taxes, upkeep, etc.) is going to be higher than comparable renting. The question becomes what is your opportunity for those extra dollars and do you invest them or piss them away on consumption.

    Over the very long-term, those extra dollars paid in housing are building equity in an “asset” that is at least matching inflation or just a bit more. With the leverage, it can be a decent return over 30 years, and really it becomes a sort of forced savings plan for people not disciplined enough to save and invest.

    Generally speaking, one would be better off financially renting and taking the extra dollars saved and investing in high-quality dividend paying blue-chips or even the general indices (but not speculating in high-flying mo-mo names unless you actually have the talent to know when to sell).

    At the end of 30 years, in one case you have a paid off house that has matched inflation, and in the other you are probably sitting on a multi-million dollar investment portfolio, and could go buy 5 houses if you wanted to.

    Bottom line, for anyone with some sophistication and discipline, housing shouldn’t be viewed as an investment unless you are owning multiple units, renting out, and collecting cash flow yield.

  12. AHodge says:

    nice
    i will say i like great depression housing crash being raised
    to remind folks the great depression was only accelerated by bad fed policy as friedman and Bernanke run on about.
    it was started by a major capital investment cycle,
    including housing which was big and early
    and all the other skyscaper, radio, airplanes new tech overinvestment stuff. and the German implosion.
    As a marker and disruptor, commodity proces had peaked, and started to collapse by late 1928, well before the US stock market probs, where in fact not many people owned stocks then.

  13. tt says:

    i think your analysis is very flawed.

    many cities in amerika have pulled back 60% on housing.

    and unemployment today, as measured like the 30s is much closer to 20%.

    it is impossible to compare though. because in 30s, boys could head back to the farm and work and feed themselves. kind of like modern china. today, there is nowhere for the boys to go back and work.

    the denominator of unemployment today is very flawed. prisoners, military, civilian gov workers all added in today. back in 30s they excluded these. makes todays rate of unemployment much less.

    br, you live in a rarified world of long island and nyc. come on out to the usa and see how bad it is where the printed money hasn’t arrived in bailouts for bankers………..

  14. tt

    I live in the world of data.

    You live in another place — filled with suppositions, emotional pronouncements, and blessedly number free beliefs.
    Many of the responses to this post reflect belief systems, and knee jerk responses.

    I have identified a MSM meme — Worse Housing market than the Depression! — that the data DOES NOT SUPPORT. If you want to marshall data to challenge that view, feel free to — but just making up numbers will not cut it.

  15. tt says:

    i bought a house in phoenix arizona in april at 25% of peak price of 5 years ago.

  16. smyers says:

    Speaking of letting the facts get in the way of a good narrative, I wrote about how so much housing coverage is based on short-term fluctuations and experts’ predictions, which have been wrong again and again. Ideas on how to improve coverage: http://ow.ly/57uAb

    Steve Myers
    Poynter.org
    @myersnews

  17. AHodge says:

    just a quibble but you and Mike C are both missing a little on own vs rent
    its only “free” if you get back your investment purchase price+ associated purchase costs + mortgage interest and charges + real estate taxes. Also + sales commission of you are doing a complete in/out.

    but mike is wrong, it can be a good investment as it was for a while,
    the house price gains just have to cover most of those. imputed rent doesnt have to be free, just the best return including imputed rent on your money.

  18. AHodge says:

    add in the mortgage interest tax break, just to be complete.

  19. dead hobo says:

    Mike C Says:
    June 1st, 2011 at 10:29 am

    During normal times, owning is cheaper than renting because you will get back your investment when you sell,causing the rent to be free.

    Causing the rent to be free?

    reply:
    ———-
    Back in the day I once applied textbook economics to situations. Later, I realized things don’t work that way. Yes, textbook economics is superior to acting on a feeling, but it’s still second best. You have to factor in real life when calculating what’s best and go from there.

    Have you ever had a psychotic neighbor, or really really really fat, blubbery self indulgent married couple pigs in the upstairs apartment that has thin walls and their bedroom is above yours. I’ve been changed for life from that. Or how about having to move out of your rented house because the landlord got a divorce and wants to move back in. Or getting evicted as a teen because your roommate likes to play the drums. These are all reasons why owning is preferable whenever possible. Factor this shit into your textbook.

  20. rfullem says:

    BR: about your facts. First facts are relative or did you forget that. Second, the comparison is simply ridiculous and deflects attention from real issues. Recall that the US had a current account SURPLUS in the 1930s and a bucket full of gold. Unlike the great depression, mortgage origination (and the global savings glut) is the primary reason why Trsy rates are presently at depression era levels, US budget deficits are blowing out, national defense budgets will be cut, and your tax bill is going up. IRRESPONSIBLE MORTGAGE ORIGINATION – Not stocks, not bonds, not FX, not M&A. The oversupply of houses and subsequent drop in prices is the aftermath. The mortgage overhang for the average homebuyer and subsequent bailout of TBTF (and shareholders) is simply the largest wealth redistribution in history and fails to reward “good ( saving )” behavior or productivity. You disagree? Simply discussing great depression similarities and waiting for the process to play out in some overhyped, underqualified economists wet dream is not a good answer. Reward good behavior, punish bad behavior- does that fit into your spreadsheet?

  21. Petey Wheatstraw says:

    The best that can be said is that the data, spurious and subjective as it is, is evolving.

    We have a double dip after support was removed. The trend is still down. Strongly down.

    Every house in the US would sell today if the price was right.

    What’s the right price?

    Nobody knows (but I’ll wager it’s less than accounted for).

    Q: Who owns all of this RE, anyway?

    A: It’s in limbo.

    Caveat Emptor.

  22. louis says:

    The only thing you can probably say is the same is the emotional response to having to leave your home.

    You probably have some crying and a few years of feeling like a failure. Then you talk about the past the rest of your life as you tell the story of how you had to leave your house because the street created a way to securitize homes. You try and tell your kids the story as they get older and then, when no one wants to hear you spew the truth on how you were left on the side of the road to die by all the policy makers, you mumble in the corner as the kids wonder if you should be institutionalized.

  23. dead hobo says:

    Shit, have to buy in today and more tomorrow if there’s a dip. The 10 year will be 2.25% by Friday at this rate. Maybe 1.75% in Sept? That’ll boost housing … no rate mortgages.

  24. Mike C says:

    just a quibble but you and Mike C are both missing a little on own vs rent
    its only “free” if you get back your investment purchase price+ associated purchase costs + mortgage interest and charges + real estate taxes. Also + sales commission of you are doing a complete in/out.
    but mike is wrong, it can be a good investment as it was for a while

    AHodge,

    Conceptually, you and I are probably on the same page. I guess I’d just nitpick on the terminology. I’d say housing was a good speculation for awhile. If you bought in the mid to late 90s before the tax law change and the great credit orgy that pumped prices and then sold sometime in the middle of the 2000s you did quite well. I’ve got a money manager friend who did exactly that. He borrowed a ton to buy a property in the late 90s in California and sold in 2002 (sold early but still did well and he knew it was a bubble he was buying into).

    Lots of things can be good speculations. Netflix might be a good speculation here having just broke out to a new high again, but I doubt it will be a good investment long-term. The company probably won’t even exist in 10-20 years (how many dot.coms are still around). I guess to me investment means there are solid economic underpinnings whereas speculation the price is irrational but you are counting on a greater fool to bail you out. To me a good investment is highly dependent on the BUY price and you can pretty much disregard the sell side whereas on a speculation you’ve got to nail the SELL to come out ahead. Someone who bought a Vegas house in 2002 and sold in 2006 did quite well…someone who bought in 2005-2006 will never see a return on their “investment”.

    FWIW, I am renting and looking to buy a multiple unit residence sometime in the next 3-5 years. My belief is the magnitude of the undershoot to the mean is related to the overshoot. I think few people properly factor demographics into the equation and you’ve got a solid trend of reduced marriage rate, family formation, etc. I think housing is going much lower over the next couple of years unless government steps in with some radical policy measures, and for the patient there will be bargains of a lifetime similar to buying stocks in 1982.

  25. Mike C says:

    Have you ever had a psychotic neighbor, or really really really fat, blubbery self indulgent married couple pigs in the upstairs apartment that has thin walls and their bedroom is above yours. I’ve been changed for life from that. Or how about having to move out of your rented house because the landlord got a divorce and wants to move back in. Or getting evicted as a teen because your roommate likes to play the drums. These are all reasons why owning is preferable whenever possible.

    That is all well and good, but that is apples and oranges to your original point. You are listing a bunch of personal preference reasons to own a house over renting. Those are some good reasons, and may very well be worth the additional cost to own. But that has nothing to do with the purely financial comparison which was your original point.

  26. Mike C says:

    Also + sales commission of you are doing a complete in/out.

    Yes, and this is a big one. My parents recently sold a house and built a new one (more expensive, against my strenuous objection) and off the top of my head I think it was something like 5-10% on the commission. This isn’t like buying and selling a stock online for $20 in and out.

    As many of the comments on this thread indicate though, this subject is something that people get emotional about and I think there is some irrational pride/feeling about “owning” one’s home.

  27. dead hobo says:

    Mike C Says:
    June 1st, 2011 at 11:43 am

    That is all well and good, but that is apples and oranges to your original point. You are listing a bunch of personal preference reasons to own a house over renting. Those are some good reasons, and may very well be worth the additional cost to own. But that has nothing to do with the purely financial comparison which was your original point.

    reply:
    ———-
    Thank you for your support.

    Hint to grasshopper: If your econ authors and teachers were as smart as you think they are, they would be rich and you would never have read their works or listened to their lectures. Thus, you analysis starts from many faulty premises. They have the right idea. It’s usually applied most crappily.

  28. blackjaquekerouac says:

    still pounding the table that “Bailout Nation” was the plan along? Obviously not. It was immediately followed by “never let a crisis go to waste” and now “Libya.” i don’t know about housing in Canada or Australia–my guess is housing in Greece could become very expensive as well actually. Having said that housing is dead because the whole thing is public policy–which was never true during the Great Depression since “land management” by the government consisted of getting water for farmers. Now of course “we take it away from the farmers” to give it to “failed real estate speculators.” This is our “Fukushima”–oddly–it says “we need to at least allow for a bank failure” because obviously no one is going to argue “land is worthless.” They certainly never did in the Great Depression. More to the point “how is it possible to have a second leg down in real estate” given the trillions in printing?” Obviously “there’s more to this than a straight up inlfation trade” yes, yes? “Certainly been true all along.”

  29. socaljoe says:

    What’s wrong with lower house prices?

    I thought home affordability is a good thing.

    I know a few professionals who had been priced out of the market by the bubble, and are now able to look at buying a house.

    Even if you’re an owner and have to sell at a lower price, your next house will be that much cheaper.

    Appraisals and real estate taxes should be coming down from bubble levels.

    In any case, no real wealth was created for society as a whole by exuberant borrowing and trading houses back and forth at ever higher prices.

    Similarly, no real wealth is destroyed for society as a whole, by the decline of real estate prices. One man’s loss is another man’s gain.

    The only thing created, then lost, is the illusion of wealth. In that sense, this bubble was no different than many previous investment bubbles.

    Seems to me, the problem is not the falling house prices but the enormous amount of debt that was borrowed against housing.

    If you can’t afford to carry your debt, it means you probably borrowed irresponsibly and deserve the result.

    If you’re a banker and lent irresponsibly, you also deserve the result.

    You got greedy and screwed up… it’s time to stop whining, take your losses, and move on.

  30. [...] The housing market is bad, but not Great Depression bad.  (Big Picture) [...]

  31. rfullem says:

    ah yes, “too much blame to go around” and “move on” – the oft-mentioned principles of the unprincipled. seems to be a majority. no wonder the country is bankrupt. have a nice day

  32. Donald says:

    THIS IS A DEPRESSION.

    Yes. It just doesn’t LOOK like one. Credit cards that people can later default on have replaced soup lines, thus eliminating any visible signs of the economic turmoil. Any of the socially discrete places for families to get food (for survival) such as church food banks, are in dire straights.
    As far as RRE is concerned, banks have a vested interest in slowly releasing the shadow inventory. It will keep them from having to report market value as well as keeping available inventory low. Having just purchased a foreclosure, I’m curious to see how much cheaper I could have gotten it!

  33. barbacoa666 says:

    In my neck of the woods, housing is cheap enough now that buyers seem to be reentering the market. I am having to compete for decent investment houses. From an investment standpoint, people are starting to overpay (note that people who intend to occupy a house will generally pay more for it than a wise investor can justify).

    I would say the bottom is here, or close at hand.

  34. dsawy says:

    First, we cannot directly compare the cherished number of “25% unemployment” during the Great Depression with the U-3 number today. They’re not remotely based on the same methodology.

    That unemployment factoid for the Depression came about from Stanley Lebergott’s 1964 study and re-creation of unemployment in the 30′s from state-level data. There was no federal unemployment data before 1940, and no BLS unemployment U-whatever data before 1947.

    Lebergott’s methodology did not count people employed in FDR’s federal works program jobs as having “jobs,” Lebergott did not exclude people who are in the military or in prison as being not part of the labor force (as we do today) and he considered teenage males as young as 14 as employable, when we put the cut-off at 16 today.

    Subsequent examinations of just the New Deal jobs programs on Lebergott’s data bring the worst of the unemployment down to about 21% from 25%, and unemployment in the later years of the Depression trends well below Lebergott’s recreated curves. If we were to use today’s methodology on Depression-era unemployment, my back-of-the-envelope reckoning would put the U-3 rate projected back into the 30′s as peaking around 18 to 19%, with the U-6 somewhere in the mid-20′s.

    Now, to the housing situation: While there is a significant variance of residential housing today vs. the 30′s, the real real estate bust in the 30′s was not that of residential real estate, it was ag real estate. Vast areas of the midwest ag lands went belly-up, not because of financial markets (which were bad, don’t get me wrong), but because of the Dust Bowl. There are few similarities in ag commodity prices, which are now being propped up by external demand and QE2 monies. The similarity of the AAA program and “Cash for Clunkers” is widely seen as humorous to old farmers today who were old enough in the early 30′s to remember FDR’s men coming around to shoot pigs, cattle and horses and give away pittance refunds to the farmers – in the name of propping up commodity prices. Cash for Clunkers was a very similar bit of thinking – destroy excess supply to create artificial demand for new cars to prop up auto companies.

    The Dust Bowl was brought about, in part, by easy lending on the part of farm banks, who, based on the strong price for wheat following WWI, would give out 100% financing to people with no farming experience to come out to west Texas, eastern Colorado, southern Oklahoma and break the sod and plant wheat. Sound familiar? 100% financing for “hotel farmers” in the 30′s, vs. people getting 100% (or higher) LTV loans who never had any prospect of repaying the mortgage. The difference between then and now is that the local banks didn’t sell off the paper, they went down with their borrowers in 1930 to 1932 when wheat prices crashed and they were piling wheat up in huge piles and letting it rot.

    This debt deflation and the debt deflation of the 30′s are not entirely comparable, but they have similar characteristics. They’re mostly in the area of finance, where bankers lied then, they’re telling big lies now, and they have vast quantities of debt on their balance sheets that are not worth anything and they need to write it down. In the 30′s, we had farm foreclosures which were held up by local actions, but then as now, the bankers did perverse and criminal things trying to foreclose on properties and peddle them off (rapidly) at sheriff’s sales.

  35. louis says:

    “The difference between then and now is that the local banks didn’t sell off the paper, they went down with their borrowers.”

    Ding Ding Ding, We have a winner.

  36. [...] by Martin Wisckol, Politics reporter Tweet Share I just noticed the note to commenters at The Big Picture blog and wonder if you think we need a similar notice [...]

  37. MacroEconomist says:

    BR, I actually think this is one of the best posts you have put up. Great job! If I could add my 2 cents to the group w/r/t housing anecdotes I have witnessed or heard in at least the top 10 gateway cities of America:

    I’m in contract to buy a home in a prime area of South Florida. I also own a recently purchased home on Long Island. I can tell you that I am very lucky to get in for a number of reasons.

    First, in prime areas of major cities like NY, Miami, D.C., San Fran, Los Angeles, there is tons of foreign cash providing ample competition for good housing stock (i.e. 50%+ of the bids).

    Second, short sales hitting the market are completely depressing comps. So you have the combination of stingy cash buyers low balling and banks who will only give mortgages at ridiculous appraisal comps. Perversely, you have sellers who in the past wouldn’t discount to appraisal. These ultimately are just becoming short sales and the market is clearing at the correct price.

    Third, no new building whatsoever.

    Fourth, I will be closing in a few weeks. I haven’t locked my rate in. I am thinking of doing a 5/1 ARM. My rate is around 2.8% right now if I locked it in today (I am not, want to squeeze a few more bips from this bond bull!). But effectively, anybody buying today could very well be seeing a sub 3% rate, with a 500 bips cap and no pre-payment penalty of course.

    The reason I am lucky is because I lost out 2 houses to cash buyers. I was able to act fast on this one, going into contract and then getting the seller to reduce to appraisal value because it was a corporate re-location. Overall, my cost of ownership is something like 30% cheaper than renting. If I were to rent the house out, my cap rate would be nearly 10%. At 5:1 leverage, my return on equity is over 20% on a cash/cash basis with a house that has fallen over 40% from the peak in a prime area and that’s below replacement cost.

    I’ll take those odds any day ladies and gentleman. That’s how you underwrite a good real estate investment. And yea, I was one of the biggest housing bears around and I cited the same analysis as a reason not to buy. The bulls didn’t believe it then and the bears don’t believe it now. Life is funny.

    So like Barry says (or wants to say), it’s all about the DATA stupid.

  38. Mark A. Sadowski says:

    Barry,
    This is one of the worst posts you’ve done.

    It’s because you’ve failed to draw the line between a recession and an asset bubble.

    One is always preventable, the other may be, but is likely not.

    I’ll probably never forgive for this.
    Mark

  39. bulfinch says:

    @ Mike C, who says: I think housing is going much lower over the next couple of years unless government steps in with some radical policy measures…

    They already have. What makes you think they won’t rinse/repeat?

    The whole idea is to keep the lead balloon aloft as long as possible.

  40. [...] 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. 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. [...]

  41. chris says:

    Barry , you must have a large home or real estate holdings to try and waste time comparing prices of real estate from depression and present.If you cant find something real move on.

  42. [...] The Big PictureThe Big Picture, a finance blog, offers these guidelines for user comments: “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,… Read more Share this: Tweet this! [...]

  43. Greg0658 says:

    I found this thread most interesting of the weeks lot .. not being a trader in the sense you all trade – we are all traders – there is no escaping that fact in this world – few over eons could go it alone absolutely

    I’ve got a couple properties and days past felt they were a prudent investment .. rent vs buy .. renting pays someone elses investment down and out of debt (normally) – to flip the debt free piece back into the trade’g world when required or wished ..
    vs buying ..
    these days indebted government bodies will push the limit to stay healthy itself .. marginally secure property taxpayers will feel the pinch .. that FMCitBPtP will hold this system in check – squeeze out the undesirables with the wealthier to carry more burden then – until the wealthier find that the stippens and small bits of flow from the marginals helped their bottom line .. that slow death spiral to rebalance with less fluff

    those reasons for owning vs renting (thanks for the memories) .. in a government mind (imo) it helps to have people commited to a parcel and a community .. in a traders mind (imo) it helps to have people with space to fill with stuff .. in a neighbor mind (imo) it helps to have neighbors with something to lose if not play’g enough of a comformist game

    those reasons for renting vs owning .. freedom to quickly moveon to hunt & gather in a new happy hunting ground (wherever that place may be)
    The Eagles – The Last Resort (no tune – the lyrics) (the Eagles frown on the shareware world)
    http://www.azlyrics.com/lyrics/eagles/thelastresort.html

  44. Greg0658 says:

    oh ps – I ment to address the “draw the line between a recession and an asset bubble”
    It is Both ..
    a Recession because world trade with cheap enough transportation fuel & massive container ships with dock & roads infrastructure to match .. then add the ability to move cash across oceans without fear of pirate ships and high seas sinking it to the bottom of the ocean ….
    an Asset Bubble because people who don’t have a work life other than trade’g .. now with houses & commercial storefront property overbuilt .. the new balance is setting in .. because FMCitBPtP is true and it takes producing widgets to have an original item to trade ..

    why its different and nearly the 2nd Great Depression (and I fear that wash-rinse-repeat) .. Joe6Pack needs an economical entry business .. that was building buildings and restaurants (generally .. 2 big 1′s) .. but nowdays to compete .. say in manufacturing is a big big big investment and requires multi disciplines of highly technical help …. lets say the Corps have the upperhand .. and thats the way they like it

  45. [...] It’s not as bad as we imagine. Is Residential Real Estate Worse than During Depression? [...]