A report last month by economist Mark Zandi for Moody's called this downturn
"the most severe housing recession since the post-World War II period." Until now, that dubious distinction was held by several downturns in the 1970s. This week we got reports showing that by the end of 2007, this housing collapse already was on par with the worst of the 1970s slowdowns. It is virtually certain, moreover, that housing will deteriorate further this year, making this decline worse than the 1970s and further making it the worst housing crisis since the great depression and World War 2.
Below the fold I will lay out the most recent, simple and stark evidence showing just how bad the decline is compared with prior downturns, and that we are still in the early stages of a housing crisis that will almost certainly be worse than any housing decline in anyone's living memory.
In a report issued two weeks ago, The U.S. Commerce Department
reported ... that construction was started on 1.353 million new homes and apartments last year, down 24.8 per cent from 2006. It was the second biggest annual decline on record, exceeded only by a 26 per cent plunge in 1980, a period when the Federal Reserve was pushing interest rates to post-World War II records in an effort to combat an entrenched inflation problem.
Many economists believe that the current slump in housing will rival the dive in the late 1970s and early 1980s when housing construction fell for four straight years before beginning to recover after the severe 1981-82 recession. For December, construction fell by a bigger-than-expected 14.2 per cent.
Within the past few days we received two more readings on the housing market: Housing Starts and Foreclosures from December 2007. Both were horrible, and indicate that we are already on the verge of surpassing comparisons with the 1970s. Let's look at them one at a time.
I. Housing starts
In December 2007, an annual rate of 604,000 new single family houses were started. This is a dramatic decline of (-56.5%) from the all time high of 1,389,000 annual rate of starts only 17 months ago in July 2005, as shown in this graph of housing starts from the 1960s to the present:
There have been only 6 declines of greater than 50% magnitude since 1920, almost a century ago. With one exception (during the Vietnam war economic boom), every such decline has heralded a recession.
Two of these prior declines are show on the chart above: from the peak of October, 1978 of 872,000 annualized starts, off (-57.5%) to 370,000 in April 1980, and off again (-61,2%) to 338,000 annualized housing starts in September 1981.
Data has only been collected since 1963 for the above chart. There was a predecessor data series, that began in the 1940s, and included all non-farm housing starts, including apartments, duplexes, and condos:
That chart shows that only two other times did housing starts fall more than 50% from their peak, which was 2,121,000 annualized units in August, 1950: off (-51,5%) to 1.037,000 units in December 1960, and again off (-61.2%) to 824,000 units in October 1966.
Our current 56.5% decline virtually equals even the worst of those prior downturns. A further decline of only 6% in housing starts will exceed all of them. In the last 90 years, there are only two prior periods of such drastic collapses: during World War 2, when production was obviously focused on other priorities, and the great depression, as shown in this chart:
All but the 1966 decline coincided with recessions. Further, none of the recessions ended until housing starts had recovered to the point where they were more than 50% of the previous peak. Anyone want to speculate on how long that might be this time around? The housing start data is very bad. It argues that the housing bust is going to have a very prolonged and significant negative impact on the economy.
II. Foreclosures
The most comprehensive records about foreclosures are kept by the Mortgage Bankers Association. In September 2007 they reported that housing foreclosures were the worst since 1979:
New foreclosures for prime and subprime borrowers combined hit record highs. They rose to 0.58 percent on a seasonally adjusted basis, compared with 0.54 percent in the previous quarter and 0.41 percent a year earlier.
The high translates into about 254,591 mortgages, or one in 172 loans, the association said.
In December, they reported that the foreclosure situation got even worse:
0.78% of all mortgages nationwide were in foreclosure, up from 0.65% the previous quarter. Delinquency rates increased from 5.12% to 5.59%, the highest level in more than 20 years (since they started collecting data using the same methodology in 1979).
It was difficult to find graphs to show you the foreclosure situation visually, but a search finally yielded this graph from the Dallas Federal Reserve Bank. Nationwide foreclosures are shown in pink. Note that the foreclosure rate has generally been rising ever since 1980:
That chart ends in 2006. Since then, the foreclosure rate has skyrocketed, as shown for example in this chart of California foreclosures (h/t Calculated Risk):
The record for California foreclosures prior to this time frame was about 1% in 1982!
In other words, by the end of September foreclosure activity showed that we were already in as severe a downturn as the 1970s. And then yesterday, we got this report of December 2007 foreclosures from RealtyTrac:
The number of foreclosures soared in 2007, with 405,000 households losing their home, according to a report released Tuesday. That's up 51 percent from the 268,532 homes that were repossessed in 2006.
Total foreclosure filings soared 97% in December alone compared with December of 2006, according to RealtyTrac, an online seller of foreclosure properties. For the year, total filings - which include default notices, auction sale notices and bank repossessions - grew 75%.
More than 1 percent of all U.S. households were in some stage of foreclosure during 2007, up from 0.58 percent the year before.
So foreclosures too are beginning to exceed even the level of the 1970s.
III. The housing collapse is almost certainly going to get much worse
By now you all know that we are only about 1/4 through the time during which ARM resets will take place. There is still almost 4 more years to go! Even more shocking is this chart, which shows the ratio of median household income to median house prices going back 30 years.
Until the last few years, the average home cost about 3 times the average household salary. But during the housing bubble, the average price surged to about 4 times income! To recede to the long-term average, with median household income at about $48,200, would require median house prices to fall under $145,000.
Currently the nationwide median house price is still $208,400.
In conclusion, the 2008 outlook by Moody's economy.com says:
The United States is deep in its worst housing slump since the Great Depression, and according to a new report, it's not going to get better any time soon.
In a new survey, Moody's Economy.com says many metro areas will record losses of 20 percent or more during the downturn, with the national median price for single-family homes dropping 13 percent through early 2009. Factoring in discount offers from sellers, the actual price decline would be well over 15 percent.
But if the above ratio of house prices to income resolve to past levels, then Moody's is being conservative: housing prices probably still have to fall over 30% before the housing bust is over. And in that case, saying this is the worst housing crisis since World War 2 may be an understatement. We may indeed be in the worst housing slump since the Great Depression.