Post-Bubble Markets: The Great Depression vs. Home Prices

by: Don Fishback

You’ve probably seen charts that compare the current stock market to the stock market of the Great Depression. But have you seen a chart of the Great Depression stock market compared to “bubble market” housing prices?

Take a look at the chart below. [click all images to enlarge]

IMAGE DJComp1 Small Comparing Post Bubble Markets

Forget the prices themselves. What we’re interested in are cyclical peaks and troughs. The eventual bottom after the 1929-1932 crash is lining up with what appears to be a bottom forming in home prices for the most speculative metropolitan areas [more on that later].

Here’s how the chart is constructed. I took the Case-Shiller Index for each of the following metropolitan areas: Phoenix, San Diego, Los Angeles, Miami, Tampa and Las Vegas. I know that other cities had high real estate prices too. But I wanted to focus on those cities that had the biggest run-up and are experiencing the vast bulk of the foreclosures.

Once I had the “Bubble Index”, I then lined up the peaks of that index with the Great Depression stock market — September 1929 for the stock market, July 2006 for the housing bubble markets. Now you have to realize that one market — housing — is very illiquid, and the index is priced only once a month. Meanwhile, the other index — stocks – are far more liquid. And the stock price chart is a weekly chart. So stocks are going to fluctuate a whole lot more than the home prices.

With all that said, I was surprised how the post-bubble housing market appears to be trying to bottom in the same time frame that the Great Depression stock market bottomed … about 149 weeks (2.9 years) after peaking. That prompted me to revisit a few other bubble markets that I had covered in prior posts.

The Nikkei bubble of the 1980s crashed, rebounded shortly thereafter, then proceeded to go on a multi-year bear market before bottoming out 137 weeks after peaking in December 1989.

IMAGE DJComp2 Small Comparing Post Bubble Markets

Also, notice the pattern of the bottom. Rally, then flat to down for a few weeks, then another leg up.

The NASDAQ bubble of the late-1990s bottomed out 134 weeks after peaking in March 2000.

IMAGE DJComp3 Small Comparing Post Bubble Markets

Notice the same rebound pattern as the bear market ended.

This chart shows that post-bubble crash similarities aren’t isolated to stock markets. After the huge Gold boom in the 1970s, bullion peaked in January 1980, crashed, rallied, then went on a multi-year bear market move that ended 127 weeks after the January 1980 peak. While the price gains and losses in this market may be different, the timing of the peaks and troughs are not.

IMAGE DJComp4 Small Comparing Post Bubble Markets

A couple of ironies, each of these bubbles seemed to define a decade, including the roaring 1920s. And after each bubble popped, you witnessed a 2-1/2 to 3 year bear market.

What’s not known is why there is this seeming coincidence. Why do completely different types of assets tend to have post-bubble bear markets that last pretty much the same time frame? Or is it just a coincidence?

If it’s not just a coincidence, will the illiquid housing market behave the same way as these liquid financial markets behave? Is housing due for a rebound after three years of down movement? Both my head and my gut tell me these chart patterns are nothing more than a human (me) looking for a pattern where none exists. It’s just a coincidence. Housing fundamentals (rising unemployment, huge inventory overhang) clearly point towards lower home prices. On the other hand, I’m sure that fundamentals for the stock market looked far worse in July 1932, yet that market rebounded dramtically in a pattern that has been repeated over and over.