How Bad Was the 1980s Real Estate Crash?

In a previous post, I wrote about how the housing market crashed in the early 1980s under the crushing weight of the 17-18% mortgage rates, and how we seem to have forgotten how bad the real estate market suffered during that period. We hear a lot though about the "worst economy since the Great Depression©," but nothing about the "worst real estate market since the 1980s."

The graph above tells the story of how bad it really was back then. From the peak of 4 million existing-home sales in 1978, there was a 50% drop in home sales over the next four years, so that by 1982 only 2 million homes were sold (data here, Table 7). It took almost two decades, or until 1996, before home sales exceeded the 1978 level of 4 million units.

So before we compare today's economic conditions to the Great Depression, we might want to stop off in the 1980s before we go all the way back to the 1930s.

Comments

[billp37]

"[I] wrote about how the housing market crashed in the early 1980s under the crushing weight of the 17-18% mortgage rates, and how we seem to have forgotten how bad the real estate market suffered during that period."

We had a new home built in Albuquerque north east heights in 1981. Interest rate, if I recall correctly, was about 16%.

Construction was way down so we got the our new home built relatively inexpensively. Then we refinanced, for fixed rates, several times after.

Then we paid off our home prior to my retirement.

Energy and water shortages in the near future may cause new construction to have to be limited.

PNM electric load forecaster Steve Martin has warned us that new construction is the primary culprit for increased electric load demand. And what the causes of increased electric load are.

home.comcast.net/~bpayne37/pnmelectric...

We may be entering a new era in homes with possibly rising energy costs and AVAILABILITY.

Electricity shortages in the US [and Iran] are predicted within the next several years.

We are starting to think about ways to close off infrequently used space in our home during the heating season. And other heat-saving ideas too.

Us of the college class of 1959 participated in cheap and available energy.

home.comcast.net/~bpayne37/whitman59/w...

We speculate that energy and water matters may change soon.

2009 Feb 02 08:36 AM

[Chris B]

The difference in the 1980's was that the Glass-Steagal Act of 1933 was still in place. It was functionally repealed in 1999.

Thus, the 1980's version of the mortgage crisis only affected the S&L's and the economy continued to function because commercial lending was still available from unaffected banks. In contrast, in the 2007-present mortgage crisis, commercial lending has dried up, because the same big banks that provided most of our commercial lending have to cover their losses from investing in mortgage-backed securities.

The great depression started in a similar way. Investment losses in the markets eventually forced banks to curtail commercial lending, which in aggregate resulted in more losses and a downward spiral. Glass-Steagal was passed in order to forcibly separate investment banking from commercial lending. The result was a 60 year period of the best banking and economic stability in the nation's history. The result of Glass-Steagal's repeal can be seen today. Perhaps we will relearn the hard lessons of our grandparents.

2009 Feb 02 10:22 AM

[Jonathan Christopher]

While few people are talking about the Glass-Steagal Act and it's repeal, I agree with Chris's comments above. At the time I was employed in the securities industry, and told everyone that would listen to me, that this was the STUPIDEST thing I had seen. I predicted then, without reservation, that this would result in Wall Street eating the banker's lunch and was wrong for the country. It was clear that the free-wheeling Wall Streeters would run circles around the rule-bound bankers.

A major policy issue should be re-establishing the equivalent of Glass-Steagal Act.

2009 Feb 02 11:39 AM

[Can'tSpotABubble?]

I would expect more technical analysis from a person of your education. Simply trotting out NAR charts and making blanket generalizations that are removed from facts and context won't cut it and sincerely leads me to believe you are campaigning for Lawrence Yun's job as others have suggested. I won't bother to tear this to shreds as I'm quite sure others will and I have more important things to do right now. (cook dinner for the kids)

2009 Feb 02 05:26 PM

[loanwolfe]

What is unfolding on a national scale is Houston during the 1980s. At that time, lenders did attempt to verify borrower's ability to repay mortgages before funding them. But if your loan is $100,000 and the REO next door just sold for $50,000 what's the point in making payments? Yes, I realize the property price seems low in this scenario, but that's what they were back then. Houston seems to have escaped the fate that's engulfed the rest of the country. There are still many people here who remember what it was like when they or their parents lost a home 25 years ago, to watch it sell at REO auction for $5,000 and still be surrounded by empty houses and "see through" buidlings. We still have a long way to go.

2009 Feb 02 07:00 PM

[neocon4jesus]

So I guess if the housing recovery in the past recession took 20 years, this one should take at least that long or longer, so we might see a recovery by the year 2030.

No way, my local realtor told me that the bottom will be within a year or two. And who would no better.

Donnie
Spring Green, WI Land of the 1 or 2 foreclosures in the county

2009 Feb 03 08:18 AM

[MikeLovesGold]

Great article!

2009 Feb 03 11:48 AM

[User 349950]

Clinton repealed the Glass-Steagal Act when he was getting serviced by Monica Lewinsky and then the likes of Robert Rubin,Larry Summers,Alan Greenspan and Arthur Leavitt already multi-multi-millionair... were praising these repeals along with Globalization and deregulation. Bush was a moron for invading foreign countries in no-win wars and bankrupting our Treasury but Clinton gets the credit for the banking fiasco as much as anyone. He should be wearing pin-stripes behind bars. Now Obama has the "Committee to save the world" back in with mainly Clintonians like Hillary,Lady Macbeth another multi-multi-millionair...
It's unbelieveable the amount of gangsterism that occurred on Wall Street. And I am suppose to have confidence when all we are doing is printing money on short term stimulus and bad banks.Housing has a long way to go down cause it was a bubble and people are losing their jobs,wealth destruction in 401k's and loss of Health Insurance. I am waiting for Bernard Madoff to strike a plea-deal and open the rotten can of worms that he was just one of many. Unbelieveable isn't it! Dirty deeds not done dirt cheap! How does it feel to be a sucker living in the land of milk and honey!

2009 Feb 03 12:36 PM

[rufusmcbufus]

But we're crashing with historically LOW interest rates. This has absolutely NOTHING to do with the 80s.
-rufus

2009 Feb 03 02:44 PM

[Tran Harry]

I'm not one to actually support real estate prices at the rate that they currently are, or currently were. The last 10 to 15 years of cheap borrowing just created an unhealthy market for real estate, and that has adversely created a storm of other expensive things that we have taken for granted.

With all the money that was ballooning in real estate equity people drove up the prices of other products such as medicine and everything out there is currently overpriced.

2009 Feb 03 10:56 PM