BR prefaces this: I am always wary about making comparisons between now and the Great Depression. The record keeping, when it existed, was much worse, and the government intervention was much greater Not too long ago, a study of NYC CRE during the 1930s looked at actual sale prices as recorded by the county clerk. Prices fell as much 65%.


Great chart from the recently released Economic Report of the President.  We suspect the Great Depression housing bust didn’t have the government props to soften the blow as we do today,  which,  therefore, on a relative basis,  makes the current bust much worse.   The prior conditions to the current bust must have been much worse than those before the Great Depression.

The Council of Economic Advisers (CEA) do note,

…during the Great Depression, the only other instance of nationwide price declines since WWI, much of the comparably-sized decline in nominal home prices was offset by a concurrent drop in general price levels, so the decline in real housing values was only about one-quarter as large as the one we recently experienced.

Thus the current collapse in housing prices is a relative price shift whereas the housing bust of the Great Depression was more a symptom of general price deflation in the economy.

If not for the decisive action of Paulson, Bernanke, Geithner and Co.  we all may have become farmers living under the freeway.    Can’t prove counterfactuals,  but that is what we  believe.   So we give them an A+ for stabilization.   Structural adjustment and long-term reform is an entirely different story, however.

We heard Meredith Whitney say this morning that 95 percent of current mortgages are backed, effectively, by the taxpayer,

…95-plus percent of mortgages today are being backed by Fannie and Freddie.  Fannie and Freddie are effectively subsidizing unprofitable mortgages that the banks wouldn’t put on their balance sheet. That’s not sustainable and ultimately the taxpayer is paying the bill for it.  The banks used to price profitable loans and you know, they’re a myriad of loan products that they’re still not pricing for profits.

Basic microeconomics tells us that government repression of prices creates supply shortages.   Think back to the rent control supply and demand graphs in Econ 101, which we have modified in the chart below.

This is one of the reason why we believe housing is so slow to recover.  Who in their right mind x/ the Govie would lend long-term money at a rate lower or close to the current inflation rate?   Rational lenders also take into account the massive monetization that is currently taking place globally and its impact on future inflation in calculating their expected real returns.

(click here if chart is not observable

Category: Real Estate

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.

19 Responses to “Current Housing Bust Much Worse Than Great Depression”

  1. endorendil says:

    If taxpayer subsidies are keeping the housing prices up (and I think that’s a given), what will eventually create the conditions for its removal? Population growth and the destruction of existing housing stock can create demand, but if lending standards (and memory) force people to only borrow what they can afford, this demand can not be fulfilled with existing housing units at artificially high prices. The market will respond by building cheaper units – smaller houses and apartments – which will satisfy demand, but the existing stock will remain viable only through subsidies.

    Only if wages rise to meet the housing prices (practically speaking: inflation) or lending standards go back to the bubble days (practically speaking: re-introducing risk-blindness and outright fraud on a massive scale) can the taxpayer subsidy be ended without causing a collapse in the prices of existing homes. Or am I missing something?

    If not, can you estimate how much further housing prices have to fall? I think that another 25% would make it fall in line with historical affordability measures, but it seems a bit optimistic to assume that there wouldn’t be an undershoot, i.e. prices would have to come down further to entice a more reluctant generation to buy in stead of rent, and to buy old-fashioned American homes in stead of newer, more high-tech, energy-conscious and especially smaller units that are likely to be built in the mean time.

  2. call me ahab says:

    “Who in their right mind would lend long-term money at a rate lower or close to the current inflation rate? “

    answer: taxpayers, whether they like it or not

  3. Jim67545 says:

    I think that the argument that government guarantee via the GSEs has reduced the supply of credit is unsupportable. Mortgages are an alternative to buying Treasuries except with a better yield. So, as long as the USA can obtain credit this mortgage market will be liquid. So, the issue is more that mortgages would canibalize the demand for Treasuries, which does not appear to be happening given the margin by which the sales of Tresuries is being oversubscribed.

    Not to say that there are no issues. The explicit (rather than implied) guarantee by the USA is a huge contingent liability which it seems everyone is ignoring. (After all, since everything is going so well there won’t be defaults.) This ties the mortgage market to the dynamics in the Treasury market. The use of a USA guarantee imparts a much better credit rating to individual mortgages than they certainly would earn on their own. Given the gap between the creditworthiness of the USA versus Joe homeowner, weaning the GSEs out of the picture will be very difficult unless we are willing to see mortgage rates rise substantially, to a level appropriate for Joe homeowner. It might cause a stop in the secondary mortgage market entirely. So, we are, in essence, using the USA guarantee to substantially subsidize the mortgage market. This was always true but especially so now when serious delinquency/losses in the US mortgages makes this investment distasteful to investors except for the guarantee, which is why 95% of mortgages are USA guaranteed.

    Then there are the distortions this imposes on the banking industry which has, in essence, deducted home mortgage loans from the products they can profitably offer. Add inroads by credit unions, disastrous home equity loans and other activities where they are, or will soon be, constrained and there is little wonder that banks are exhibiting weaknesses and have to practically zero out deposit interest and service charge the heck out of their customers. Glad I’m out of it.

  4. rktbrkr says:

    This RE depression isn’t over, we don’t even know what inning it is.

    the numbers avail for sale are hugely distorted by the shadow inventory – and of course the NAR machinations.

    There are plenty of foreclosure chickens looking to roost as the judicially imposed freezes come off.

    Don’t think the govs acquiesced to bankster frauds and foreclosures in the 30′s either, it’s brave new world where playing the “systemic risk” card gets you out of jail!

  5. Through the Looking Glass says:

    This gives whole new meaning to that bumper sticker “Honk if I’m paying your mortgage”

    Seems we are all in this together, except for maybe those 1% ers with tax deferrals and banks get away squeaky clean with all the cash. ‘ No loan for you’ soup Nazi.

  6. louis says:

    “If not for the decisive action of Paulson, Bernanke, Geithner and Co. we all may have become farmers living under the freeway.”

    Give it time, the ramifications of stabilizing their peeps is far from over.

  7. Greg0658 says:

    3.5 hours old of a thread & I’m #2 .. lets see if this starts a discussion

    “95 percent of current mortgages are backed, effectively, by the taxpayer” .. does that mean ..

    the all for all general public holds the juice once the economy returns .. that old style housing will be slow to return into favor because of over builtness … but multi-flats commune style may be required to some time .. and then they will fall from favor

    and that folks better find a way to survive in the coming new economy years .. because imo pushing in the 2D world is also falling from __ (fill in the blank)

  8. MayorQuimby says:

    Alls we have done is preserve the preconditions for another epic collapse. Credit, unbacked is being injected into the economy at a fantastic rate. Wages do not go up but prices do. Inventories build and at first demand picks up and then it all goes to crap in a hurry. Look at wages over the past ten years and compare cost of living and it is off the charts. It is all going down.

    Keep thinking this is the eight inning. All we did was reset the entire game. It was a rain out. It is all going to happen again and worse.

  9. Expat says:

    The premise is ridiculous. The story should be about the record bubble. The “crash” is simply a re-adjustment to normal market prices. It is obvious that we have much farther to fall from the ridiculous heights we attained. I repeat, this was not a “crash”; it was the popping of a giant, speculative, credit-filled bubble.

    Why not a new graph which shows how speculating in tulip bulbs is almost riskless? We can draw a graph contrasting today’s market and the market in Februray 1637. Gosh, this is the best market ever because you lost only 30% on your tulip bulbs.

  10. Bruman says:

    I wonder if that supply-demand chart shouldn’t really be about the spread over treasuries rather than the absolute interest rate. The ZIRP policy is supposed to make it easier for banks to lend, and it does that by trying to force the yield curve to be steep.

    And even if you use absolute nominal interest rates those straight supply and demand lines are almost certainly curved in strange directions when you get close to zero.

  11. AHodge says:

    good stuff–though your caveats should apply
    i think a real only house price analysis is incomplete..
    a great depression 65% nominal house price fall is highly deflationary itself–
    even if you could turn around and buy more goods w the sales price.
    i think most folks especially if they only read losers like Friedman Bernanke and Fisher
    dont realize how much the great depression was also early housing driven
    not just pricing but building and jobs
    there is more decent 1930s data than you might think
    new residential building contracts-kind of like starts but $
    peaked in March 1927 and fell– if i remember– 62% by end 1930.
    thats both volume and $
    but the general deflation was only just getting started by end 1930

    but housing clearly bigger-relatively- in this latest one
    I’m a Merideth fan in spite of her wrong/early/? muni call
    (Greg take note)what she means by ultimately taxpayer paying the bill for it
    is that F/F and FHA below market subsidies are NOW accruing $50-100 bio a year further future losses,
    adding to their say $1/2 trillion in the hole balance sheet
    but those will only be realized in the next big downcycle
    probably later in the decade

  12. Through the Looking Glass says:

    “If not for the decisive action of Paulson, Bernanke, Geithner and Co. we all may have become farmers living under the freeway. ”

    And if the 15 trillion $ were dispersed into the economy we might all have been able to save our homes and spend our way out instead of throwing it into that black hole called the “Financial system”

    Next time let the the banks go under and the people survive.

  13. Pantmaker says:

    “We suspect the Great Depression housing bust didn’t have the government props to soften the blow as we do today, which, therefore, on a relative basis, makes the current bust much worse.”

    As time passes what I think will be clear is that the government took the sum total of the current housing damage and simply spread it out over a longer period of time giving the impression of a softened blow. It’s like a watching a car accident in slow motion.

  14. VennData says:

    LOL, don’t let the lack of data stop you from making quantitative comparisons, I mean Obama has ruined America right?

  15. Greg0658 says:

    walking the dog .. I could hear ‘quasiGSEs sucked all the life out of the __’ & ‘they took our jobs’
    which is it ? gov saved or sucked jobs .. we don’t need no stinking __ (nets)

    MEW and new home building for Joe&Jane 6Pack and QE# for Bill&Brenda wineglass & MIC HomeSecurity For All

    oh and __ Says:* = moderated que flushed – fyi **** drops – Louis & I were typing together
    (I understand new listers, old hacks :-) and linky dumpers moderated) but how about a sign (again – for the _X)

  16. donna says:

    The great depression was not caused by a housing bust, and most people then owned homes outright rather than having mortgages. There really is no way to compare the two situations properly.

  17. willid3 says:

    seems like if we want to compare to the 1930s have to also remember there weren’t long term loans at all (10 years was the norm for mortgages). and mortgages didn’t work like they do now. you would finish one 10 year note just to start another.
    many complain that the the government needs to get out of mortgages. have forgotten or just plain don’t know that prior to F&F, there were no long notes. and houses had to be much cheaper as you had a much shorter window to pay them off. and with todays economy, what bank etc is ever going to tie up their capital on even a 10 year note? and if they can’t sell them any more (and what investor wants there any more???) they would have them on their books a very long time.

  18. NDD says:

    Barry, I haven’t had the chance yet to formalize the numbers, and in
    particular I don’t know how this graph’s measure of housing prices in
    the Great Depression was calculated by the President’s office, but it
    is almost certainly badly misleading.

    According to the Case-Shiller 20 city index, housing prices have
    fallen 33.5% from their peak in 2006.

    In the Great Depression era, housing peaked in 1925, and according to
    Shiller’s “Irrational Exhuberance,” fell 30.4% from there to their
    bottom in 1933. Here’s a post where I link to the data: http://

    While our current situation is worse according to this measure, it
    isn’t that much worse, and I submit that in this case the nominal
    prices are the best way to look at it.

    Why? Two reasons: (1) Because housing itself is a component of
    inflation, in fact about 1/3 of the total modern measure. (2) I hope
    you are sitting down for this one, but did you know that housing has
    actually gone UP 7.9% in the last 5 years? That’s because of our old
    friend, “owner’s equivalent rent.”

    So the graph featured on your blog takes the 30% decline in housing
    (probably less if it starts in 1929) and measures it against the 25%
    or so decline in overall inflation from 1929-33, and finds that
    housing only declined about 10% or more in “real” terms.

    Then it takes the OER-infested current measure of inflation and
    deducts the full housing decline from that.

    I.e., it is comparing apples and orangutans.

    If you take out OER, and replace it with the Case-Shiller index in
    the modern CPI, you actually wind up with a DEflation of 2% over the
    last five years.

    In other words, at the end of the day, the only way to support the
    graph, even removing OER, is to say that this housing bust is much
    worse than the Great Depression bust because things like food and
    energy also declined then, whereas food and energy are up well over
    10% in the five-plus years since this bust began. Does that sound
    like a legitimate measure to you?

    Hence, the graph is almost certainly misleading.

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