While I may be the only financial commentator studying the similarities between the economy of the late 1920s and the present, the striking parallel I find between the two time periods is something I find a personal duty to share with my loyal readers.
Back in 1927, the property market in the U.S. started to fall apart. Real estate prices started to fall in America in and about 1927. Consumers who had purchased homes at relatively high prices of the era started to witness a fall in their home values. As home prices fell, so did speculation in the real estate market and the demand for houses.
We face a very similar situation today, 80 years later. 2007 will likely be the first year since the Great Depression that the median selling price of a home in the U.S. will fall. We are actually worse off now than in 1927 as the collapsing subprime loan market and re-setting of billions of dollars in ARMs (which did not exist in 1927) are pushing home foreclosures in the U.S. up sharply.
And even though the U.S. housing market was coming apart in 1927, the stock market continued to rally higher and higher. We face the same situation today. (Witness the Dow Jones Industrial Averages outstanding 283-point single day run-up on July 12.) While the housing market comes unraveled, Wall Street continues to plow ahead.
The same thing happened in 1927. Housing prices then were falling but the stock market kept moving higher. It was not until 1929 that the first stock market crash (one that preceded the Great Depression) came. If I had to bet my money, my bet would be that we will see the same thing again: The stock market here won’t go down until 2009, two years after the housing market’s hard landing.
The good news: If you are a stock market investor, you can expect stock prices in the U.S. to continue rising for the next two years. After that, the American housing and property market will be in such a mess that the tight purse strings of American consumers will hit the stock market like a brick wall.