This housing crisis is not the Great Depression

The latest housing report from Capital Economics garnered a lot of attention this week for comparing the last few years to the 1930s. The subject line of one email HousingWire received Tuesday from the Toronto-based firm read: “US Housing Market Monthly – Worse than the Great Depression.” Coverage on CNBC, later aggregated by the Drudge Report, stated “the housing crisis that began in 2006 and has recently entered a double dip is now worse than the Great Depression.” The economist who wrote the note, Paul Dales, said the level of press coverage surprised him. He said the actual eight-page, 24-chart report focused little on the generational comparison, which happened unintentionally, despite taking prominence in the email subject line. “During the course of my research, I realized that the fall in house prices has been larger and quicker than during the Great Depression,” he said. Dales added that the comparison is not a a publicity stunt nor does he believe his research can be extended beyond commentary on housing price volatility. “Granted data around the Great Depression are sketchy, but in no way am I comparing the macroeconomic conditions of that time to the current recovery,” he said. “I don’t think unemployment will reach 25%, for example, or that another recession is guaranteed.” According to Capital Economics analysis of the recent Standard & Poor’s/Case-Shiller index, housing prices recently fell by 33%, eclipsing the 31% fall in the late 1920s and early 1930s. Dales believes prices are likely to fall another 3% this year, resulting in a 5% drop for 2011. Robert Shiller also provided the possibility a doomsday pricing decline of another 10% to 25% fall. But this is for house prices, and not the housing market as a whole. It is not to say that things are rosy in other aspects of housing, home affordability is reaching new highs, but access to credit remains constricted. For every foreclosure currently on the market, RealtyTrac estimates, there are another three in the pipeline. It was a different situation, particularly in regard to foreclosures, in the early 1930s. About half of all mortgage debt was in default during the Great Depression, according to HousingWire research. By 1932, national unemployment reached 25% according to the Kansas Department of Labor. The Federal Deposit Insurance Corp. estimates about 9,000 banks suspended operations back in the ’30s, resulting in losses to depositors of about $1.3 billion. Annual mortgage lending fell 80% and new residential construction dropped by 80% as well. What’s more the types of mortgages common in the Great Depression were phased out, potentially because of the relative ease in which lenders could foreclose. According to a research report last year from PMI, in the period before the establishment of the Federal Housing Administration, the Federal National Mortgage Association (the government agency that was the precursor to Fannie Mae), and other government housing agencies, virtually all mortgages were shorter-term (less than 10 years), balloon loans that were callable at any time by the lender. “With depository institutions needing liquidity during the Great Depression, many loans were called — and with prices having fallen sharply, unemployment having skyrocketed, or both, many homeowners could not pay back the principal amounts of their loans or refinance,” the PMI note states. “Therefore, many lost their homes even though they could continue to make their payments.” This scenario does not exist today. Mark Fleming, chief economist at CoreLogic (CLGX), said accurate housing price record keeping did not start until the 1970s, and he supports Dales assertion that Great Depression comparisons are speculative. “Based on the work of Robert Shiller, in real terms, prices fell prior to the Great Depression between 1916 and 1920 and were relatively stable during the Great Depression,” Fleming said. “In more broad economic terms, some have estimated the unemployment rate to have been as high as 25% during the Depression, which is significantly higher than in this or any other recent recessionary period.” “By that economic benchmark, this recession is not comparable to the Great Depression,” Fleming said. Write to Jacob Gaffney. Follow him on Twitter @JacobGaffney.