Housing slide worse than Great Depression?

That’s the assessment of the US housing market decline from the British newspaper The Independent, and it’s true … technically. From peak to trough, the fall in average single-family home values since 2007 has hit 33%, surpassing the 31% drop in housing prices during the Great Depression:

The ailing US housing market passed a grim milestone in the first quarter of this year, posting a further deterioration that means the fall in house prices is now greater than that suffered during the Great Depression.

The brief recovery in prices in 2009, spurred by government aid to first-time buyers, has now been entirely snuffed out, and the average American home now costs 33 per cent less than it did at the peak of the housing bubble in 2007. The peak-to-trough fall in house prices in the 1930s Depression was 31 per cent – and prices took 19 years to recover after that downturn.

The latest Case-Shiller house price index was just one of a slew of disappointing economic data from the US yesterday, which suggested ebbing confidence in the recovery of the world’s largest economy. The Chicago PMI manufacturing index showed a sharp slowdown in the pace of expansion in May, missing Wall Street forecasts and sending the index to its lowest since November 2009.

We should keep a couple of things in mind when making comparisons to the Great Depression, however. First, this collapse in home values follows a lengthy bubble that mainly applied specifically to home values. What followed in this case was a recession, not the serious deflation seen in the Great Depression that lowered all asset valuations, not just homes. That’s one reason why it took 19 years for home values to recover from the Great Depression.

Housing values still seem to be searching for a bottom, but we’re probably getting closer to it now. Adjusting for inflation, we’re still a little ahead in home value than at the start of the bubble in 1997-98. The actual data from the Case-Shiller report puts average single-family home value at the mid-2002 level. What we’ve lost is most of the irrational valuations created by government-warped lending incentives and the loose money that fueled them. The crash in the 1930s set homeowners much farther back, as most of those losses were in real valuation and not just a correction against the irrational.

In other words, the issue is less how much prices have fallen than about how much prices irrationally rose in the first place.

Still, this news does show the folly of the attempts by the Obama administration to use tax money to keep the revaluations from proceeding as they were inevitably going to do anyway through gimmicky tax credits on home sales. All that did was postpone the inevitable, incentivize purchases that would have been made anyway, and end up costing those buyers more than they saved in paying for a house with the credit. It also reminds us that government intervention in markets to pick winners for political purposes does much more damage than good, and almost always hurts the very people that intervention advocates claim to be assisting.