Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
UK EU Election Results, Brexit Party Victory, Labour and Tory Bloodbath, UKIP and ChangeUK Die - 27th May 19
The Three M's of Hyperinflation : Milosevic, Mugabe, And Maduro - 26th May 19
Global Multi-Market / Asset Charts Review - 26th May 19
An Oil Shock Could Be the Black Swan That Finally Drives Gold Higher - 26th May 19
Brexit Party Forces Theresa May to Resign, Boris Johnson Next Tory Prime Minister? - 26th May 19
IBM - Investing in AI Machine Intelligence Stocks - 25th May 19
Seasonal Dysfunction: Why Generations of Gold and Silver Investors Are Having Such Difficulty - 25th May 19
Employment - The Good and the Bad of Job Automation - 25th May 19
Gold Mining Mid-Tier Stocks Fundamentals - 25th May 19
Buy This Pick-and-Shovel 5G Stock Before It Takes Off - 25th May 19
China Hang Seng Stocks Index Collapses and Commodities - 24th May 19
Costco Corp. (COST): Finding Opportunity in Five Minutes or Less - 24th May 19
How Free Bets Have Impacted the Online Casino Industry - 24th May 19
This Ultimate Formula Will Help You Avoid Dividend Cutting Stocks - 24th May 19
Benefits of a Lottery Online Account - 24th May 19
Technical Analyst: Gold Price Weakness Should Be Short Term - 24th May 19
Silver Price Looking Weaker than Gold - 24th May 19
Nigel Farage's Brexit Party EU Elections Seats Results Forecast - 24th May 19
Powerful Signal from Gold GDX - 24th May 19
Eye Opening Currency Charts – Why Precious Metals Are Falling - 23rd May 19
Netflix Has 175 Days Left to Pull Off a Miracle… or It’s All Over - 23rd May 19
Capitalism Works, Ravenous Capitalism Doesn’t - 23rd May 19
The Euro Is Bidding Its Time: A Reversal at Hand? - 23rd May 19
Gold Demand Rose 7% in Q1 2019. A Launching Pad Higher for Gold? - 23rd May 19
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Housing Bust Lessons From the Great Depression:

Housing-Market / US Housing Sep 05, 2007 - 12:23 AM GMT

By: Dr_Housing_Bubble


Best Financial Markets Analysis ArticleA Letter from a former Banking President Discussing the Housing Bubble

With the incredible response we had to a personal letter from a lawyer discussing in great deal, the failures of the previous Great Depression bubble we can see many parallels emerge to our current potential future. For one, the wanton greed and disregard of financial prudence. The inability to see beyond the current market and realize that history has a mischievous way of sneaking up on those who forget her. There is no longer a debate regarding the once fabled housing bubble. We can all take off our tinfoil hats off and begin to construct a vision of the future in the midst of a collapsing housing market. Today I'll be posting an article that came out in the Saturday Evening Post in November of 1932 from a former bank president in New York, three years after the crash, highlighting the economic situation of a post bubble world. This is an old article so I retyped the important paragraphs:

“If I draw illustrations from the banking field to indicate the limits to which the depression reached, it is only because I am writing about banks and not because the banks are the one glaring example marking the extent of the financial cataclysm. The railroads, the insurance companies, the building-and-loan societies and mortgage companies would quite as well depict the situation.”

The collective memories of many Americans believe and associate the Great Depression igniting from the heart of Wall Street. However, it is clear that many industries built around financial imprudence also failed during the Great Depression. Think of the many industries currently facing hard times with the housing decline: insurance companies, mortgage lenders, hedge funds, the auto industry, home remodeling centers, and many other housing associated industries. Can it be that for the past decade, we have been using the home as a center of economic prosperity? Clearly it has helped to a certain extent with unparalleled amounts of mortgage equity withdrawals . There are estimates from the FDIC that $5 trillion in wealth has been directly linked to this housing boom . How much was really lost during the three years following the Crash?:

“The decline in the price of bank stocks was only a minor phase of our debacle. The quoted value of all stocks listed on the New York Stock Exchange was, on September 1, 1929, $89,668,276,854. By July 1, 1932, the quoted value of all stocks had fallen to $15,633,479,577.”

“Stockholders had lost $74,000,000,000. This figure is so large that not many minds can grasp it. It is $616 for every one of us in America. It is, roughly, three times what we spent in fighting the World War. The bursting of the South Sea Bubble concerned a single company. In the bursting of the New York Stock Exchange bubble, the value of all stocks fell to 17 per cent of their September 1, 1929, price – almost as great a drop as the South Sea Company stock, with its fall to 13 per cent of its top price. Remember that this calculation is not a selected example. It is made from the average of all stocks listed on the Exchange.”

So $74 billion was lost. A massive amount. What would happen if say the $5 trillion in housing wealth would suddenly disappear? Instead of bank failures we are now facing hedge fund debacles and everyday it appears that another mortgage outfit is closing shop. Mortgage resets are hitting the market to the tune of $30 billion a month with our peak month hitting in October with $50 billion resetting. We will not fall below the $30 billion monthly mark until September of 2008. Most experts are now predicting a declining market until 2009 and these are optimistic projections.

“The South Sea Bubble wasn't so much! We have done pretty well in the way of bubbles in our own time. All financial history shows no parallel to what we have been going through. Never before, in this country or anywhere else, has there been such a general loss in “security” values.”

Bubbles will always occur in profit driven systems because of human nature and bubbles will bust when they reach a Minsky Moment . In addition, the psychology at a certain point tips and the market no longer follows previous rules. The system was built on consistently appreciating real estate and when this ended, it turns out that millions of people were swimming naked. The only question now is how long will the market retrench. Unbelievably, those that pumped up the bubble are crying for compassion for the desolate homeowner now losing his home even though he is laughing all the way to the bank. Since he is partly responsible for the massive speculation, why doesn't he cut a check from his decade long bubble profits if he feels so bad? Instead, they want the entire nation to carry the burden of this massive credit orgy. If they truly believe in free market capitalism, then what is currently happening is the end result; the market is washing out all the excess from the system. Yet the Fed injecting liquidity amounts to corporate welfare and is only prolonging the inevitable decline.

“The decline in the quoted value of New York listed stocks is only part of the story. The total of real-estate mortgages in default, particularly mortgages on city property, is unexampled. The value of real estate can no longer be accurately appraised, because the market for real estate has been practically paralyzed.”

We are already seeing this. Many REO properties are simply sitting on the market and stubborn lenders and sellers are refusing to lower prices. Buyers are refusing to buy or are unable to get loans. It is a Catch-22 that is accelerating the market on a downward spiral. People realize that housing is going down and are suddenly reluctant to buy. The MBS market now seeing the intestines of their portfolios is realizing that some overpricing may have occurred. I'm not sure if any of you have seen the new housing syndicate marketing angle (I caught a glimpse of this on late night infomercial happy television). They are now pushing, get this, FHA loans! Suddenly, the industry that pumped interest only, hybrid, reverse mortgage, 2/28 loans, stated income, and every other weird concoction of loans is coming home to the safest of the safe. But the scary implication here is they are touting, “no need to worry here, these are government insured.” Guess that means the American tax payer is going to bail out the housing industry. At least this is what the housing industry expects.

“The loss of $74,000,000,000 in the value of New York listed stocks is something more than a mere item of financial data. Implicated in it are ten million cruel heartaches. I am using “million” as an adjective, and making an understatement. The laborious savings of an uncounted number of lifetimes have been swept away. Prudent provisions for the future has been made to contrast unfavorably with the pleasures of spendthrift waste…”

The real pain is in what happens on a micro level. Like the couple earning $130,000 a year that lost their home to foreclosure and is now facing hard times; these are the real stories behind the bursting bubble. What is the psychological and financial impact of those put into 2/28 homes and are now facing foreclosure? There is no financial benefit to the buyer for jumping into a 2/28 loan aside from squeezing into a home they cannot afford over the long run. The only one benefiting from this is the mortgage broker who gets a stronger kick back for putting you into a risky loan and the agent from getting a commission check after escrow closes. What do they care? The loan is getting an extreme makeover on Wall Street and they'll never see it again. The transparency legislation now being pushed is 7 years too late. Wall Street has turned off the spigots earlier in the year. Don't worry about the large mortgage outfits, many top CEOs and executives actually sold out [ are in the process of selling out ] near the peak.

“Not only did our investments shrivel in the last three years but we even frequently lost our pocketbooks. Cash in hand, left for safekeeping in a bank, often went the way of our investments, and worse. Almost $3,000,000,000 of our daily-used cash funds were sequestered in the doubtful assets of the 4835 insolvent banks. Widespread communities were left with only the mattress as a safe depository, and with little to put into it. People became so frightened in regard to the safety of the banks that they locked up in safe-deposit vaults, or selected elsewhere, more than $1,500,000,000.”

We don't have to worry much about losing savings accounts considering Americans now have a negative savings rate. Try imagining you are now in 2009. What do you think the sentiment of the American public will be when trials are going on regarding shady lending practices? Many defunct companies are now getting their legal houses in order preparing for this. Even with the previous scandals such as Enron, many folks saw this as something far and away since few even understood what Enron did or what laws they broke. But everyone will understand the debacle of the housing industry because it hits every American. It is a simple story of greed and financial negligence. And one thing is certain, Americans do not like gambling with their homes unless they are winning. Now that many are losing, they'll be out for blood. The Democrats are already taking aim and claiming it is the mortgage brokers fault for putting us in this mess. Of course there are other major players including the Fed, hedge funds, buyers/sellers, agents, appraisers, and flat out greed.

“This is a shameful and humiliating exhibition. It is uniquely bad. Across the border in Canada, there was not a single bank failure during our period of depression, and one must go back to 1923 to find even a small one. Nowhere else in the world at any time, were it a time of war, or of famine, or of disaster, has any other people recorded so many bank failures in a similar period as did we. We were not experiencing a war, a famine or any other natural disaster. All the economic tribulations we have undergone in the past three years have been man-made troubles, and Nature has continued to shower us with an easy abundance – more, indeed, than we have known how to distribute with economic wisdom.”

We are facing a healthy economy as well. Unemployment is low. Wages are holding steady. GDP is still growing. Too bad most of this growth is heavily influenced by the credit bubble. Like the former banking president states, this credit bubble mess is another "man made problem" as well. Where this market will take us is anyone's guess but I'll leave you with the final paragraph of the article:

“Human stupidity and cupidity were the taproots of this great financial disaster. Those are evils which will always best us. There have, however, been revealed faults and weaknesses in our banking and investment practices that account in part for the extreme nature of this experience. Isn't it about time that we began thoughtfully to examine some of the fundamentals of our banking and investment theories and methods?”

Subscribe to Dr. Housing Bubble's Blog to get more housing content and your full dose of Real Homes of Genius.

By Dr. Housing Bubble

Author of Real Homes of Genius and How I Learned to Love Southern California and Forget the Housing Bubble

Dr. Housing Bubble Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


03 Oct 07, 21:44
Housing Bust - We're All Responsible

The builders, developers, lenders, Realtors ... you can point fingers all you want, but what lies at the heart of the real estate bubble burst is a culture obsessed with living beyond its means. Many bought more house than they needed - an industry blinded by dollar signs enabled it - all not just to keep up with the Joneses, but outdo them.

I actually just finished a new novel that satirizes all this and cites the collapse of Florida's housing industry in the late 1920s as historical precedent. Written by an industry insider and painfully funny - it's called "Ocean Raton."

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules