HOW THE 2007 HOUSING BUST STACKS UP HISTORICALLY
By Walter Kurtz, Sober Look
Goldman recently completed a thorough study on housing busts around the world and throughout history. The study covered the time period since 1890 for some dozen “developed” economies (including for example the US housing bust of the 1920s). The idea was to assemble statistics on the pre and post-bust economic trends. That in turn allowed them to gauge what was or was not typical about the US 2007 housing bust.
In general the study found that after the bust, the economy experiences the following trends:
1. The GDP growth is sluggish for a prolonged period
2. High unemployment and relatively high output gap persists
3. Double-dip recessions are not common
4. The private sector deleverages while the public sector leverage increases
5. Interest rates remain low for a long time
6. Stock returns are modest, consistent with slow GDP growth
Based on these findings, it turns out that in general the US housing bust was severe but not that unusual. The chart below shows the historical distribution of housing market corrections for all the nations and periods included in the study. The 30-35% correction in the US housing market (as scary as the experience has been) is not outside the range of other housing busts (DM refers to developed economies).
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| Source: GS |
There are however two indicators that do stand out:
1. The US public sector leverage increase is sharper than the historical range.
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| Source: GS |
2. As discussed before, the level of real interest rates in the US is completely outside the historical range.
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| Source: GS |
Other indicators for the 2007 housing bust are roughly within the historical range for such events.
6 Comments
Walter Kurtz, thanks for this good article, much appeciated. You point out two anomalies of the current period post-housing bust. But there is a third anomaly that you neglected to mention, namely:
“6. Stock returns are modest, consistent with slow GDP growth”.
However, the U.S. stock returns since the March 2009 bottom have NOT been modest, nor have they been consistent with the slow GDP growth since then. Corporate profit margins have been abnormally high, and stock returns have been in the high teens on an annualized basis, far in excess of the long-term average of 10%. Vanguard Total Stock Market Index fund is up 20% annualized over the last 3 yrs. Does the author believe that the experience of history argues that this should “mean revert” over the next few years?? Thank you.
Since corporate profits are currently driven by Federal deficits, mean reversion will occur if the Federal deficit goes down.
It is noticed that real interest rates are below the historical range. But the trend for nominal long term interest rates from 1981 to present is actually rather consistent. It has been a steady decline averaging about 0.25% per year when you smooth it over all the short term business cycles. Perhaps the real rate is so low because of deliberate policy decisions by the Government and the Fed.
My source for the 3 yr performance of the Total Stock Market index:
http://www.google.com/finance?q=MUTF%3AVTSAX#
maybe the Fed has learned the lessons from the previous busts and taken actions which may make such historical analyses meaningless ? The economy is a dynamic, non-linear system where wealth is constantly being created and inputs are being amplified or dampened by financial engineeering – so not clear how things will evolve
Check out this paper from the Boston Fed.
Examine the causes of the housing bubble, and refutes many common culprits.
http://www.bostonfed.org/economic/ppdp/2012/ppdp1202.pdf
It’s main conclusion is that all of the participants reacted rationally, from an irrational belief in continually rising house prices.
So all this did was confirm the data from “This Time is Different”. Why is this news?