Lots of ink (and bandwidth) has been spilled over the "Cause" of the Depression. The chart above should be of interest to people who talk about "Smoot-Hawley" (which was imposed AFTER 1929) and those who claim that it was the eeeeeeevil Hoover.
More likely the eeeeeeeevil Fed, which raised the discount rate and thus the price of housing--which then went into a tailspin beginning in 1925.
Also note that income did take a drop in the early 1930's, but it was not a spectacular one.
HT: Calculated Risk
A rise in the discount raises the cost of financing. Given that a significant amount of housing is financed, a rise in the discount rate tend to lower home prices. The primary financing instrument prior to the Maes was the balloon note. As the balloons came to maturity and had to be renewed, there was default pressures. That may be an interesting corrolary to the ARMs, which for all practical purposes behave as balloons.
ReplyDeleteA rise in the cost of financing ALSO depresses home-building and home renovations.
ReplyDeleteSo when homebuilding drops, so does employment (although in this cycle, the "unemployment rate" is not jumping up because a large percentage of non-union construction workers are illegals...)