A protracted winter is imminent for housing: Lessons from the Great Depression Part 36

A protracted winter is imminent for housing: Lessons from the Great Depression Part 36. From 1917 to 1945 home prices lagged the overall inflation trend. With one decade in the book, can Americans stomach a stagnant real estate market for another 20 years?.

Imagine home values being stuck for 30 years or even falling behind the overall rate of inflation.  Does this seem outlandish?  Something similar happened to U.S. real estate between 1917 and 1945, the generation before the baby boomers.  Much of the stagnation that occurred during this time was due to the painful economic damage caused by the Great Depression.  But even before the Great Depression real estate had been losing its luster.  It was a gripping time for the nation.  I was digging through pages of data looking at long rate information from that period and found interest rates at that time were also extremely low.  Of course residential housing did not play such a big role in the scheme of global financeslike it does today.  Nonetheless you have to wonder with nationwide home prices falling and mortgage rates at generational lows, what more can be done to spark the housing market?  Unfortunately not much, unless the economy including wages starts to stabilize and increase for most Americans. What did it in 1945 was the baby boom and the economic fortune that had fallen the U.S. because of other industrialized nations trying to rise from the rubble of war.  Similar to the Great Depression years with low interest rates and many people losing their homes, it is hard to create a housing boom when more and more of household income is consumed by other costs of living.  In real terms we have already lost one decade in housing.  Are we starring at another 20 years of stagnant home values adjusting for inflation?

This is part 36 in our Lessons from the Great Depression series:

31. When government and financial institutions become one.

32. Housing prices continue to fall as other costs eat up disposable income.

33. The McDonald’s and paper-mill education economy funded by a too big to fail bank.

34. Tracking housing values from 1940 to 2011.

35.  How will mood be impacted for the next decade because of the real estate bubble bursting?

The lost generation of housing

I was curious to see how housing held up in the first half of the 1900s.  It is an interesting trend:

case shiller great depression

What is even more fascinating about the above is how real estate underperformed the overall market and actually fell below the 100 baseline for over 30 years.  When bubbles pop things tend to also over correct to the downside and we really haven’t seen that on a nationwide scale even with this current housing bubble popping.  Real estate historically has been a very good barometer at tracking inflation.  Just take a look at the second half of the century up until today:

case shiller 1950s 2011

The recent mega bubble starting in the late 1990s coincides with many things but in particular, the repeal of Glass-Steagall.  The ability for banks to take unholy amounts of leverage and mingle it in with their more stale investments put our entire financial system on the brink of collapse.  Do people still remember the memorable days of the U.S. Treasury Secretary Hank Paulson begging on bended knee to Representative Nancy Pelosi to bailout the giant banks in our country?  You also had Federal Reserve chief Alan Greenspan lowering mortgage rates to insanely low levels in the start of the 2000s.  The two above charts show for over 100 years of data housing has been a good measure of overall inflation of the nation but not much more.  That is why for such a long time buying a home was second nature for most and didn’t require obscene levels of debt.  This notion of taking on so much debt at a household level is a novel new concept.  I doubt the Egyptians were buying McPyramids with jumbo mortgages trying to keep up with the Pharaohs.

Betting big on jumbos

In a previous article we discussed that the Senate went ahead and extended the heightened loan limits for conforming mortgages.  This act of comedy was done even though the amount would have dropped from $729,750 to $625,500.  Even this was not enough and you have pundits with no sense of perspective claiming that this was somehow okay to help high priced areas.  Since when has it been the government’s job to subsidize sky high housing markets?  I was trying to find some data on the push for this and found something rather fascinating which sheds some more light on this issue:

jumbo loan market

Agency debt was practically non-existent in the jumbo market for the last 20 years.  Even at the peak of prices, most of the jumbo debt was taken on by the private banking sector.  But look at 2009 and 2010.  The jumbo market, a decent sized market with nearly $200 billion in originations in 2009 and slightly less in 2010, suddenly was made up of half-agency debt.  In other words the government is entering into uncharted territory here to aid the banks and keep their business brisk.

I’m not sure this is the best use of resources trying to prop up the many markets that still resemble and show signs of bubbles.  The only reason the government dove in here is to keep prices inflated regardless of market forces trying to adjust prices to a new economic reality hitting most Americans.  It is a fascinating trend and early data shows the same pattern for 2011 in the jumbo loan market.

New home sales not budging into fall and winter

New home sales are on path for another horrible year.  In spite of all the financial trickery and smoke and mirrors new home sales are merely a shell of what they were in the bubble years:

new homes sales sept 2011

The red columns are sales for 2011.  Just compare that to the dark blue of 2005.  We are no where remotely close to those sales numbers and it is highly unlikely we will see those figures emerge again even in the decade ahead.  A large part of it stems from the new amount of housing coming online from baby boomers downsizing.  This will happen and there is little that can be done to pause this inventory unlike the shadow inventory.  Slowly the market is working its way through on a nationwide scale but what about those markets that still have bubbles?  Banks may try to recapitalize on a larger scale and slowly move on inflated markets as their balance sheet becomes better (aka more taxpayer backing).  The future demand is likely to come for lower priced homes just like we are seeing today.  There is little evidence showing household income stabilizing or moving higher in recent years.  This would be the first place to examine if we were to see future changes in the trend of housing.

I know that 30 years must seem impossible for those nursed at the hands of this decade long housing mania.  Yet look at the data and you will find that this was a complete anomaly for housing.  If history is any guide even minor housing bubbles over corrected to the downside.  What is more important unlike the wild swings in the stock market, there is unlikely to be a wild push for prices upwards.  What we have today on a nationwide scale is a disjointed real estate market where some areas may be stable, some barely experienced a bubble, some are foreclosure centrals, and some are still in flat out in bubbles.  Those expecting a return to the bubble days are largely mistaken.


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