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Is Residential Real Estate Worse than During Depression?

Posted By Barry Ritholtz On June 1, 2011 @ 7:25 am In Data Analysis,Real Estate,Really, really bad calls | Comments Disabled

“Worse than the Great Depression!”

That seems to be the rallying cry of every media outlet [1] 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 [2] by Prof Shiller in his book Irrational Exuberence [3].  (Historical data for the CS index only goes back to January 1987). Charts, such as this one [4], 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 [5])

2. Unemployment was 25% at its Depression peak; the 2007-09 Recession never saw U3 Unemployment get over 12%. (BLS [6])

3.  GDP lost 30% in the Great Depression; During the Great Recession, we lost 6% of GDP. (BEA [7])

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 [8]) 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 [9]. But worse than the Great Depression? I don’t think so . . .

Never let the facts get in the way of a good narrative!


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2011/06/is-residential-real-estate-worse-than-during-depression/

URLs in this post:

[1] media outlet: http://www.google.com/search?q=%22Worse+than+the+Great+Depression!%22&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a

[2] hypothesized: http://www.econ.yale.edu/~shiller/data.htm

[3] Irrational Exuberence: http://www.amazon.com/exec/obidos/ASIN/0767923634/thebigpictu09-20

[4] this one: http://www.multpl.com/case-shiller-home-price-index-inflation-adjusted/

[5] Census Bureau: http://www.census.gov/hhes/www/housing/census/historic/owner.html

[6] BLS: http://www.bls.gov/news.release/empsit.toc.htm

[7] BEA: http://www.bea.gov/national/index.htm#gdp

[8] Estate Prices During the Roaring Twenties and the Great Depression: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1470448

[9] forecast back in 2005: http://www.ritholtz.com/blog/2005/05/dont-buy-housing-bubble-propaganda/

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