The Second Great Depression or a Blip on the Radar?

by Justin Weinger on August 28, 2007

Depending on who you ask, the “crisis” surrounding the United States housing market is likely to go one of two ways: 1) the decline in the price of homes, and the subsequent drying up of the housing ATM is going to lead the country into the second Great Depression; or 2) yes, home prices will continue to sag for the time being, but the economy is strong enough to withstand this due to strength in other sectors.

With so many opinions flying around, each with pretty significant data backing them up (heck, you even get both points of view on this very site) it’s pretty tough to know who to believe.

I was reading an interesting article on MarketOracle.com today which talked about the parallels between pre-Depression America and where we have been over the last couple of years.

It seems both bubbles – the equity bubble in the 1920s and the housing bubble of the 2000s – were borne out of people using money they didn’t have (either buying massive amounts of stocks on margin or using creative financing to get into a home that they couldn’t realistically afford) to try and build wealth, all in the face of stagnant salaries.

In both instances, the prices of what was being bought ended up being far too inflated for the underlying fundamentals. Once this caught up both items ended up seeing a precipitous drop in price (not necessarily value). We all know how it ended in the 1920s, and, unfortunately, how it ultimately ends today is still very much in the air.

On the other hand, you have articles like this one on Bloomberg.com which make the argument that the housing crisis may have already passed. The actual point of the article wasn’t to say that a housing turn around is imminent (although the author does say it could be closer than what many pundits are saying), but it was to show that the economy will survive and still move forward even as housing continues to sag.

The author also offered the reassurance that while nothing goes up forever, nothing goes down forever either. The population in America continues to grow and this growing population is going to need a place to live. Because construction has dramatically slowed down, at some point the supply/demand balance will even out, and the market will begin its usual five to eight percent annual increase.

So, who do you believe?

For what it’s worth, I think we’re going to come down somewhere in the middle. I don’t believe the bursting housing bubble will lead the country into another depression, but I don’t think we’re going to come out of this quickly or smelling like roses. It’s almost a foregone conclusion that we will enter some sort of recession and unfortunately many people are going to have some pretty tough economic and financial times ahead.

If you can weather the storm, even if it takes a couple of years, in the long term you should be just fine.

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{ 3 comments }

Kim August 28, 2007 at 6:29 pm

We currently rent, but plan to buy in the next 2-3 years. I couldn’t be happier about the current housing market. I plan to snap up a fantastic bargain when my time comes!

Bob Pessemier September 6, 2007 at 8:54 pm

Another point is that the Government has implimented controls to prevent things like the 20’s crash. Not that it couldn’t happen again, but for different reasons and differnt circumstances.

One of the best things people can do is become more educated about the basics.

Brian Carr September 7, 2007 at 7:36 am

So then doesn’t that beg the question of whether the Government should step in to prevent these bubbles from occuring in the first place? Kind of protect us from ourselves?

I understand the whole free market concept, but as long as there are greedy people in the world, situations like this are going to continue to pop up.

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