Bryan Caplan  

Home Prices During the Great Depression

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Home prices did amazingly well during the Great Depression.  According to Schiller's index, it looks likes inflation-adjusted prices fell from about 74 to 69 between 1929 and 1933 - about a 7% decline.  By 1940, they were up to about 82.  The double-dip recession of 1937-8 shows up as a small downward blip in the housing market, nothing more.

What gives?  I realize that nominal housing prices must have declined massively during the rapid 1929-33 deflation.  But the resilience of the housing market in the depths of the Depression is still most puzzling.

P.S. I'm supposed to be on Fox and Friends this morning at 7:50 talking about my new book.

Update: Here's my interview with Gretchen Carlson.

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COMMENTS (17 to date)
Phil writes:

If you take the long view, homes are nothing more than a store of value, not a means of creating value. I am a renter, have been for years, and see no reason not to continue to be. Real estate is a good investment only for those who lack the discpline or knowledge to do real research into investments that provide a positive inflation-adjusted return.

HB writes:


I wouldn't be so quick to characterize all homeowners as lacking fiscal discipline. Housing is also a consumption good. Owning grants the right to customization. Furthermore, the supply of rental housing in certain upper-middle-class neighborhoods is often limited, leaving purchasing as the only option. To conclude, you cannot view housing as a strict investment decision - at least for most consumers who garner utility from more than just a roof over their head.

Justin Ross writes:

At the time, mortgages were just started making their way into the housing market, which likely made housing a smaller share of the household budget, and one that was plausibly made more carefully. Consider this from the NYT:

It was not until the 1920's and the spread of the automobile that home mortgages outnumbered farm mortgages. In the 1930's, the mortgage industry got a huge assist from the feds — not from the tax deduction, but from agencies like the Federal Housing Administration, which insured 30-year loans, and, over time, the newly created Federal National Mortgage Association, or Fannie Mae. Before then, the corner bank would issue a mortgage and wait for the homeowner to pay them back; now savings and loans could replenish their capital by selling their mortgages to Fannie Mae — meaning they could turn around and issue a new mortgage to someone else.

The article then describes how the mortgage took off in the post-WWII era, as more families became eligible for the MID.

Peter writes:

RE: Fox & Friends appearance: Pffft Jason Priestly ..I guess he has what will be the typical distortionary and knee-jerk response from someone who hasn't heard the argument. I can't say I expected more.

ziel writes:

Great job on F&F - I think you got your points across quite effectively and you looked and sounded very assured, professional, and likable.

Garrett H writes:

I have to admit I kind of cringed at the summary points that were displayed below your name. They sort of took your words out of context.

B writes:

What great stagnation?

Maybe only 10 years ago this interview would have been lost to ether. Now it's online for instant consumption within a couple hours.

Scott Sumner writes:

Ex ante real interest rates were extremely low in 1932-33. Ceteris paribus that would have been expected to raise housing prices. Something similar happened in the 2001-03 recession, when declining business investment led to low real interest rates, which tended to raise housing prices.

jc writes:

@Phil and @HB: You're both right, of course. It's not an investment decision for most (even if many pretend it is, i.e., we all find reasons to do what we want to do, and 'it's a good investment' sounds like a quite reasonable reason). And if it *was* an investment decision, one probably could do better.

@Justin Ross: thanks for the link

@B (or anyone): are there any online compilations of similar "What Great Stagnation?" examples?

(That would actually make a good name for a very simple website - or even a blog post title - where users could add everything they could think of. Whether there is or isn't a great stagnation, I'd enjoy seeing a list like that.)

John Thacker writes:

Regarding home prices, I'm pretty sure that Randall O'Toole at Cato (and also Ed Glaeser at Harvard) would say that one big reason was the relative lack of zoning and land-use planning. In the absence of supply restrictions, home prices stay relatively stable, tied to availability of land and the cost of construction. With swings in the economy come swings in the amount of added supply. Also note that it was much quicker to build a house in those days, get permits, etc.

In the presence of supply restrictions, the supply doesn't change rapidly with demand, so the effect is greater price swings up in a boom and down in a bust. In addition, because permitting and such takes so long, even when supply does change, there's a lag in the effect, so that additional supply that started going through permitting in the boom comes on the market in the bust, and similarly it takes longer for the new supply to hit during the next boom.

Douglass Holmes writes:

Dude! You need to give us more warning. I would have loved to see you on Fox and Friends, but this is one morning that I didn't even turn on the television. I certainly would have watched if I had known you were going to be on.

mark writes:

1) The square feet of homes back then was dramatically different from now. Median hOmes today may be 3-4 times larger. Convert Case Shiller to price per square feet and see what the chart looks like ( I am not a big Case Shiller fan).

2) More of the population rented as opposed to becoming a high risk marginal buyer.

3) More vacation houses now. (Case Shiller does not distinguish vacation houses).

Mark A. Sadowski writes:

Although the previous comments all have their points I'm surprised nobody has actually bothered to look at Shiller's data.

The Shiller real housing price index averaged 99.5 in the 27 year period from 1890-1916. The index dropped from 97.0 in 1914 to 65.6 in 1921. from 1917-1944 the index averaged 74.2. Then from 1945-1997 it averaged about 110.

The 1917-1944 period was an historical anomaly, when real housing prices were consistently much lower than either before or since. It would be difficult to see how they could have dropped much further even in the wake of the Great Depression.

Mark In Florida writes:

A home being merely a store of value doesn't seem to quite cover it. I bought a home, paid it off over 8 years and then lived rent-free for the next 20 years (taxes, ins. maintenance were minimal compared to comparable rent) and sold it for 5 times what I paid.

So I saved 20 years of rent besides the profit on the house. That rent would have totaled about 4 times the cost of the house. So the gross return over 28 years was 9 times what I paid for the house.

That's not to mention the psychic value of knowing no one could tell me to pack up and relocate at the end of each year, or ask to inspect every six months, being able to remodel as I wished, and let the yard go to hell if I felt like it.

I just can't imagine the life of a renter.

John Brennan writes:

Well, home prices didn't do that well during Great Depression and the market was not resilient--it was awful (especially if you look at housing starts). The adjustment for inflation during a deflationary period hides the massive nominal crash in home prices. Remember, people paid their mortgages (which did not decline) with nominally declining wages--one of the reasons for higher foreclosure rates--the other reason being high unemployment rates.


I must say that your anlysis--reliant on Case-Shiller is rudimentary and largely uninformed. Do some basic research next time.

John Thacker writes:

@John Brennan:

But Bryan does in his original post state that he's sure that the nominal price value crashed massively, and I'm sure no one disputes that that caused enormous problems for borrowers. But it's still reasonable to wonder why they didn't decline in real terms-- which it at least related to the fact that in the Roaring Twenties home prices didn't increase in real terms either.

John Brennan writes:

@John Thacker:

That is my point. His observation of the nominal decline is the most relevant point, since people pay off mortgages in nominal terms, not adjusted terms. Adjusting for inflation during a deflationary crash is counter-intuitive, irrelevant and the index adjustments mask this fact. His broader point is that the market was swimmingly good--which is insane! If you look at new housing starts as a reflection of the broader market--something pretty basic--new home construction levels did not reach 1929 levels until 1939. Not as resilient as Caplan's argument might have you believe. One flawed measure does not make a quality market analysis.

I think that blog readers--whether its of Taylor, Krugman, Caplan, Thoma, Kling or whoever--need to be critical when one of these economists fails to accurately capture an issue. Don't be a sycophantic bootlick.

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