Housing Prices Have Already Fallen More than During the Great Depression ... How Much Lower Will They Go?

George Washington's picture

I noted in January that the housing slump is worse than during the Great Depression.

The Wall Street Journal noted Tuesday:

folks at Capital Economics write in with this gloomy tidbit: “The
further fall in house prices in the first quarter means that, on the
Case-Shiller index, prices have now fallen by more than they did during the Great Depression.


By their calculations, prices are now down 33% from their 2006 peak, compared with the 31% decline during the Depression.

The Independent agreed on Wednesday:

ailing US housing market passed a grim milestone in the first quarter
of this year, posting a further deterioration that means the fall in house prices is now greater than that suffered during the Great Depression.


brief recovery in prices in 2009, spurred by government aid to
first-time buyers, has now been entirely snuffed out, and the average
American home now costs 33 per
cent less than it did at the peak of the housing bubble in 2007. The
peak-to-trough fall in house prices in the 1930s Depression was 31 per cent – and prices took 19 years to recover after that downturn.

How Bad Could It Get?

The above-quoted Wall Street Journal also notes:

The remarkable thing about this downturn is that even though prices have fallen by more than in the Great Depression, the
bottom has yet to be reached. We think that prices will fall by at
least a further 3% this year, and perhaps even further next year.

I pointed out in December:

[Nouriel] Roubini said
that the United States “real estate market, for sure, is double
dipping”, and and predicted that banks could face another $1 trillion
in housing-related losses.


Now Zillow is forecasting that U.S. home values are poised to drop by more than $1.7 trillion this year.

In a real worst-case scenario, how far could housing decline?

Dean Baker argued in January 2010:

Real [i.e. inflation-adjusted] house prices are still 15-20 percent above long-term trend.

In March of this year, Gary Shilling predicted that housing would decline another 20%, and wouldn't recover for 4-5 years.

I reported last year:


co-creator of the leading house price index - Robert Shiller - says
that he is worried housing prices could decline for another five years.
He noted that Japan saw land prices decline for 15 consecutive years up
to 2006.

Indeed, it is possible that housing prices may never return to their peak bubble levels. See this, this and this.

I noted in 2008:

In the greatest financial crash of all time - the crash of the 1340s in Italy ... real estate prices fell by 50 percent by 1349 in Florence when boom became bust.

Shilling's prediction is within the realm of historical events: it is
already worse than the Great Depression, it could get as bad as the worst depression of all time ... 1349 Florence.

Moreover, while the 1349 was limited to one city-state, the current crash is more or less global. I pointed out in 2008:

The [current] bubble was not confined to the U.S. There was a worldwide bubble in real estate.


Indeed, the Economist magazine wrote in 2005 that the worldwide boom in residential real estate prices in this decade was "the biggest bubble in history". The Economist noted that - at that time - the
total value of residential property in developed countries rose by
more than $30 trillion, to $70 trillion, over the past five years – an
increase equal to the combined GDPs of those nations

Housing bubbles are now bursting in China, France, Spain, Ireland, the United Kingdom, Eastern Europe, and many other regions.

Why Is This Happening ... And What Can We Do to Fix It?

Government economic policy that does nothing meaningful to tackle unemployment and the failure to prosecute mortgage fraud are largely responsible for the slump in housing.

Until those policies are reversed, housing could keep declining for a long time.

As I explained last year, the government's entire policy regarding housing is counter-productive in the long run:

When housing crashed in 2007 and 2008, the government had two choices. It could have:

(1) Tried to artificially prop up housing prices;


(2) Created sustainable jobs, broken up the big banks so that they stop driving our economy into a ditch, and restored honesty and trustworthiness
to the economy and the financial system. All this would have meant
that the economy would recover, and people would have enough money to
afford to buy a new house. (See this).

The government opted to try to prop up prices.


as I have repeatedly pointed out, the government's entire strategy has
been to try to artificially prop up the prices of all types of assets.


For example, I noted in March:

The leading monetary economist told the Wall Street Journal that this was not a liquidity crisis, but an insolvency crisis. She said that Bernanke is fighting the last war, and is taking the wrong approach. Nobel economist Paul Krugman and leading economist James Galbraith agree. They say that the government's attempts to prop up the price of toxic assets no one wants is not helpful.


The Bank for International Settlements – often described as a central bank for central banks (BIS) – slammed
the easy credit policy of the Fed and other central banks, the
failure to regulate the shadow banking system, "the use of gimmicks
and palliatives", and said that anything other than (1) letting asset
prices fall to their true market value, (2) increasing savings rates,
and (3) forcing companies to write off bad debts "will only make
things worse".




David Rosenberg [former chief economist for Merrill Lynch] writes:

advice to the Obama team would be to create and nurture a fiscal
backdrop that tackles this jobs crisis with some permanent solutions
rather than recurring populist short-term fiscal goodies that are only
inducing households to add to their burdensome debt loads with no
long-term multiplier impacts. The problem is not that we have an insufficient number of vehicles on the road or homes on the market; the problem is that we have insufficient labour demand.

Indeed, as I pointed out
in April, unemployment is so bad that 1.2 million households have
"disappeared", as people move out of their own houses and move in with
friends or family.


BIS wrote in 2007:

governments feel it necessary to take direct actions to alleviate
debt burdens, it is crucial that they understand one thing beforehand.
If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.



Baker said last November that the government's hasn't really helped homeowners, but has really been helping out the big banks instead:

big talk in Washington these days is "helping homeowners".
Unfortunately, what passes for help to homeowners in the capitol might
look more like handing out money to banks anywhere else.


who benefits from "helping homeowners" in this story? Naturally the
big beneficiaries are the banks. If the government pays for a mortgage
modification where the homeowner is still paying more for the mortgage
than they would for rent, then the bank gets a big gift from the
government, but the homeowner is still coming out behind.




are simple, low-cost ways to help homeowners who were victims of the
housing bubble and lending sharks.... But this would mean hurting the
banks rather than giving them taxpayer dollars, and we still don't
talk about hurting banks in Washington DC.

Similarly, Zack Carter wrote yesterday:

Treasury Dept.'s mortgage relief program isn't just failing, it's
actively funneling money from homeowners to bankers, and Treasury likes
it that way.


Economics whiz Steve Waldman [writes]:

The program was successful in the sense that it kept the patient alive until it had begun to heal. And the patient of this metaphor was not a struggling homeowner, but the financial system, a.k.a. the banks.
Policymakers openly judged HAMP to be a qualified success because it
helped banks muddle through what might have been a fatal shock. I
believe these policymakers conflate, in full sincerity, incumbent
financial institutions with "the system," "the economy," and "ordinary

Baker has also said in
numerous interviews this week that the only thing the temporary tax
break for first-time buyers has done is moved home purchases up by a
couple of months. In other words, the credit didn't motivate people who
weren't planning on buying a house in the near future to buy. All it
did was motivate people who were already planning on buying this year to
buy before the credit expired, thus creating no real boost to the
housing market.

The bottom line is that home sales are plummeting
because housing was in a bubble. While most assuming that Americans
are being more frugal and deleveraging - so that we will soon "get
thorough this" and home sales will finally bottom - that assumption might not be true.


Instead of fixing the real problems
with our economy or genuinely helping struggling homeowners, the
government has made everything worse by trying to artificially prop up
asset prices in a way that only helps the big banks.

And as banking analyst Chris Whalen wrote last month:

An aggressive combination of reflation by the Fed and restructuring
of the housing and banking sectors is the way to restore US economic
growth, but you won’t hear about restructuring large banks from
adherents of the neo-[i.e. faux] Keynsian faith.


of embracing a permanent state of inflation, as has been the case in
the US since the 1970s, we need to deflate the bubble and start again.
It is not too late for President Obama and Congress to restructure the
US financial system, fix the housing market and create the conditions
for true economic growth.

Lest you think I am unfairly criticizing Keynesian economics, I pointed out last year:

doves" - i.e. Keynesians like Paul Krugman - say that unless we spend
much more on stimulus, we'll slide into a depression. And yet the
government isn't spending money on the types of stimulus that will
have the most bang for the buck ... let alone rebuilding America's
manufacturing base. See this, this and this. [Indeed, as Steve Keen demonstrated last year, it is the American citizen who needs stimulus, not the big banks.]




Today, however, Bernanke ... and the rest of the boys haven't fixed any of the major structural defects in the economy.
So even if Keynesianism were the answer, it cannot work without
the implementation of structural reforms to the financial system.


little extra water in the plumbing can't fix pipes that have been
corroded and are thoroughly rotten. The government hasn't even tried
to replace the leaking sections of pipe in our economy.

In truth and in fact, the government's policies are not only not
working to stem the rising tide of unemployment, they are making it worse.

Forget the whole "Keynesian" versus "deficit hawk" debate. The real debate is between good and bad policy.

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Derpin USA's picture

First and foremost, swings in values from bubbles to busts always include a low-side swing below actual value. That's the nature of the beast. It's rational to expect that even if current home prices are rational and logical, they will still fall further regardless of other factors.

But there are other factors. There is the contraction in the credit market itself. There is the tightening of lending standards and down payment requirements. There is the shadow inventory being held by banks and currently off the market (a current positive but longterm negative).

Most importantly in my eyes is the fact that the average credit score in the country has dropped significantly, and a far higher percentage now have a foreclosure on their report. So long as banks hold these people to the old standards based upon normal economic conditions, this will continue to be a large contributing factor.

A 15-20% drop from here is not just possible but likely, and as it continues, strategic defaults will become even more commonplace, leading to a wonderful feedback loop of prosperity.

Buck Johnson's picture

The price of realestate will never get back to what they where.  In another generation it might, but by that time it we won't be using the dollar anymore.

Akrunner907's picture

Burn baby, burn.  I think we will see another 20 to 30 percent drop in real estate values from their current level.  It is time for realignment of the global economy and the US and Europe have only one direction to go - DOWN!

I am Jobe's picture

Shocking. Just unbelievable.

Arttrader's picture

Perhaps the more relevant question is:  were they having enough children per family to create reasonable demand in the 20 years after the crash.  They were then.  We aren't now.

apberusdisvet's picture

Housinjg prices fall = lower tax base = failed attempt to raise property taxes = greater unemployment in public sector = more foreclosures = neverending downward spiral.

Meridith Whitney was just one year too early on municipal defaults.


At least a decade of pain.

sitenine's picture

[deleted by author]

Smiddywesson's picture

Yes, real estate isn't coming back anytime soon.  There aren't any jobs for the hordes of unemployed people who used to service the housing bubble.  Taxes are going up everywhere as tax revenue declines and I don't see that reversing.  Farmland is a good investment, but only if you have enough cash to defend it from the tax man.  A lot of people lost everything to the tax man during the Great Depression.  This time around, people don't have any savings, many are out of work, inflation is squeezing us, and they are slying preparing to devalue the currency.  

Bottom line on farmland or housing: Don't bit off more than you can chew.    

MIDTOWN's picture

You can't put a date on this... The investors in the securitization process have been burned by fraud.  The issues that led to the fraud have not been addressed and the criminals in the process are still on the streets.  FNMA is toast, Freddie Mac is toast.  VA loans are the only guaranteed loans that are still obtainable under reasonable terms.


I look for the values to drop to price levels similar to those seen prior to securitization.

spinone's picture

Residential is going to be a side show compaired with the damage done by CRE. Expect another bank crisis.

Temporalist's picture
Buyers, sellers of food stamps use Facebook to connect



blindman's picture

directly related to income distribution, no?
so should go very low until such time the
average person is given commercial bank status
and can borrow at .01 % from the fed just like
derivative leverage gods, and if it goes bad
they get bailed out.
related carry trade movie.
ICELAND: Main reason for capital controls was the carry trade; ‘glacier bonds’ amounted to 50% of GDP

Eireann go Brach's picture

George, you really like to validate yourself and feed your own ego..you have some good reports but the ego feeding is annoying.

JamesBond's picture

what do you expect from the KING of cut-n-paste?

lamont cranston's picture

The bottom will not be in until 2015...maybe - too much property out there, unless the banks decide to bulldoze on a mass scale.

Plus, there's no job growth, so where will the  buyers come from? I'd downsize if I could find a buyer.

YTD through 5/31, 57% of my company's environmental RE consulting biz comes from short sales and bank REOs. 3 years ago it was ZERO.

PulauHantu29's picture

From what I can see there is no bottom yet. Even two analysts, one from DB and one from GS said housing prices will not stop dropping until jobs stabilize and that will not happen for 8 to 10 years.

That's about right if you look at RE cycles historically---they run in 8 to 12 year cycles.

diesel1104's picture

I have been told on good authority that banks here in FL are actually paying up to $35,000 to homeowners who have already stopped paying there mortgage to actually allow the bank to take over the house without protest.  His comment was that they (banks) must e getting lots of money from somewhere to make those deals.

malek's picture

Sorry GW, but your maneuvers so to not collide with the opinions of Paul Krugman are an attempt at futility.

Vampyroteuthis infernalis's picture

The sheeple will accept their fate until nothing is left. They will wake up poor and homeless. Only until then, will a constructive dialogue that may lead to a solution of the mess occur.

silvertrain's picture

I like farmland also..Even smaller mini farm tracts like 10 acres are holding decent value and are being bought up in my area..Ive been watching this very closely as I would like a 20 -40 acre piece and I am thinking that the time has come to act for myself..Its still running at 4k an acre for A-1 Ag and isnt budging, I am not going to wait much longer...

Bicycle Repairman's picture

"Wall Street Journal also notes: the bottom has yet to be reached.  We think prices will fall by a further 3% this year, and perhaps even further next year."

LOL.  Unemployment is rising.  Wages are dropping.  Savings are evaporating.  Lending standards are getting tougher.  Interest rates are at an artifical low.

It took a generation for housing to recover from the great depression.  And in between there was a little thing called total USA victory in WWII.  This time it will take several generations, if ever, for RE recovery.  Any USG efforts to promote recovery will simply extend the recovery period.  And you can expect the USG to throw everything they have at it.  Including your grandchildren's futures.

MrBinkeyWhat's picture

I am a real estate appraiser. (stop it OK). When the market is set by foreclosures, and there is an indeterminate number of additional foreclosures, what is the smart money going to do? Wait for the dump...DUH!

At some point the "real value" of the asset is revealed.

Personally I like farm land, but that is another story.

DosZap's picture


Personally I like farm land, but that is another story.




Good luck finding any for sale, that will actually produce food, that 90% of the people cannot afford

now because of skyrocketing prices.


Plus, prepare for the  Fed Conglomerate to stop you from growing food  to just FEED yourself and families.( can't have that)


I still find it somewhat amusing, that there are actually people here(on the Hedge),that think the .gub wants to SOLVE this problem.


Newsflash, they are doing this to you & I on purpose,the sooner you get IT, the better chance of survival you will have.

Spitzer's picture

And the Aussy and Cad housing bubble continues to grow.

Vampyroteuthis infernalis's picture

The Aussies' bubble is already bursting. Canucks are next.

2DollarBill's picture

$28 million, 9000 sqft condo just sold in Toronto to a foreign buyer. $3100/sqft has to be the top.

Smiddywesson's picture

No, I adamantly disagree that this is another Depression, it's much worse.  Banks faced a liquidity crisis back then,  not insolvency. Four very important differences exist today:

1.  This is a global economy.  There aren't any economies exiting recession before us, or entering after us, everything is one big economy.  These events used to be dampend a bit by irregular effects on foreign markets, but trade won't save you now because your trading partners are also feeling the pain.

2.  The Great Depression didn't involve global soverign debt levels equivalent to insolvency.  This is a very big gorilla in the room.

3.  The efficiency problem:  Efficient economies and resource delivery systems produce great results when everything goes splendidly, but fall apart when anything unexpected happens.  Zero Inventory and Just In Time Delivery resulted in the shelves being bare within 3 days in Japan.

4.  All of our local farms are gone.  The US was primarily a agricultural and manufacturing economy back in the Depression.  Today it is a service economy and is particularly sensitive to a depression.

5.  Propaganda control of the people:  People are more ignorant than they were back in the day, but not about everything, just money and history.  They know they are being stolen from and they know who is doing the stealing.  The propaganda machine is holding back the floodwaters of emotion.  Rather than people learning about what has happend a little at a time and growing to accept it, they are going to learn all at once.  That can lead to civil unrest when a group of pampered mushrooms learns they are just a statistic.

Need I go on?  Things are very different today.  People don't have the innocent trust in government they had during the Depression and they certainly don't have the civility or respect for the law they had then.  This is going to turn bad in a way that will make the Depression look like nothing. (Not to mention the coming trade wars, EMP exchanges, and cyber wars).  This is going to be a wild ride for the next 25 years, at least.

Smiddywesson's picture

"It is not too late for President Obama and Congress to restructure the US financial system, fix the housing market and create the conditions for true economic growth."

Great article GW.  I love the quote concerning the USG having a choice to fix the system or just prop up prices, and they chose to prop up prices.  I definitely don't agree with the person you quoted that it's not too late, however it may have been when he said it.  

We have reached 100% debt to GDP.  Anyone who believes they can repair the system now is sticking their heads in the sand.  All they can do is buy time and move us to a new system, a system which will screw the average Joe who still has any money left, because they need all the money they can get to eliminate all that fiat debt.  We already know what type of financial system the central banks are slowly creeping towards, and I have no idea what the price of gold will be, but it would be wise to get out of fiat into anything that will hold value.  This is going to be a very exciting summer.

DavosSherman's picture

All bubbles overcorrect - we'll have a 40% retracement from 1999 levels.  Another depression is what this is.

mayhem_korner's picture

All bubbles overcorrect...

What's your basis for this?  Implicit in your thought process is that you have some insight as to where prices ought to be at all times. 

Try to define "overcorrect" without a reference to the "correct price" and you should see the flaw in the construct.

Hook Line and Sphincter's picture

Bubbles do overcorrect. But this time, like reverse rent control, you might see the gov go more insane and come in to set the prices, regardless of whether real estate sells. Got to stop those TBTF balance sheets from showing more insolvency than they already do you know. After which they have provided enough time to cover tracks, obfuscate, and loot the remaining wealth they let it crash, and pick up the remains por nada.

I'm still wondering how a few people without credit will be able to buy or rent these home and business structures without credit or jobs, and how the remainder of the populace in camps, are going to have the money to afford their rent once released...


TheMerryPrankster's picture

Its like a FEMA roach motel, once you check in, you never check out.

The real question is when does the encroaching economic rot infect Washington D.C.? The rulling class will do nothing to fix the real problem and everything to support the status quo, until the gangrene appears on their own body politic.

Housing is a symptom, not a cause per se. As a fever is an indication of an infection, so to housing is a symptom of the real disease rampant unemployment caused by destruction of the economy through globaliztion of "free trade" the syphillis of the economic thinkers which rots their brains and leads to ever more desperate and stupid predictions and observations.

Repeal "free trade" let China rot, rebuild the nation with domestically produced goods,crops and services. its certainly repairable, we were once a vibrant self sufficient nation, we could do it again with proper leadership and policies.

Bradley Manning sits in prison without a trial under the auspices of being a traitor to this nation, when the real traitors dine on filet mignon at Darvos.

Housing prices will represent a reasonable multiple of real wages, as real wages decline so to will house prices.

Xavier Doe's picture

"Bradley Manning sits in prison without a trial under the auspices of being a traitor to this nation, when the real traitors dine on filet mignon at Darvos."


dxj's picture

... but was there a giant housing bubble prior to the great depression? Not exactly a useful comparison and borders on hyperbole.

ratso's picture

Great point. The questions is "fallen from what level?"

No one has ever written about a housing bubble preceding the Grest Depression.

The Great Depression is not a parallel historical event.

Arttrader's picture

Perhaps the more relevant question is:  Were they having enough children to create reasonable demand in the 20 years after the crash?  They were then.  We aren't now.

Prometheus418's picture

Perhaps I'm missing something in your comment, but yes, Virginia, there *was* a giant housing bubble prior to the Great Depression.