Real Estate Bubble Crystal Ball? The Great Depression and Manhattan Home Prices

A decade before the 1929 stock market crash there was a booming real estate market in New York City that Assistant Professor Anna Scherbina says resembles the housing bubble of the 1990s and 2000s.

In a recent radio interview, Scherbina discussed an index of home prices in Manhattan between 1920 and 1939 that she and Associate Professor Tom Nicholas of the Harvard Business School collected by hand from the Manhattan Public Library archives. This data set is informative because the housing market in Manhattan represented 5% to 10% of all the U.S. real estate wealth at that time.

According to Scherbina and Nicholas’ working paper, “Real Estate Prices during the Great Depression,” the prices for a typical Manhattan house increased 62% in a run up of the 1929 stock market crash and then lost 51% of that value by the end of 1933. By 1932 and 1937 the stock market showed signs of rebounding, but real estate did not, according to Scherbina. A house purchased in 1920 would have lost 51% of its value (in inflation-adjusted terms) by the end of 1939. Scherbina and Nicholas report that it wasn’t until 1960 that housing prices recovered.

The upshot for today, according to Scherbina, is that owning a house is not necessarily a lucrative long-term investment based on its long-term exchange value. She explains that given maintenance costs and fluctuations in the real estate market, it is difficult to profit financially. Scherbina contends investors would do better investing in stocks and bonds because they can spread wealth across diverse investments and have the flexibility to sell some assets when necessary. Home owners, on the other hand, can’t sell some of their house when the economy shrinks, yet families do not value or think of their homes simply as a long-term investment.

In June Scherbina presented her research about stock price volatility to investment professionals at CalPERS and CalSTRS, the nation’s two largest public pension funds. Her study, “Unusual News Events and the Cross-Section of Stock Returns,” co-authored by Turan G.  Bali of Baruch College’s Zicklin School of Business and Yi Tang of Fordham University’s School of Business, identifies a pattern in which stocks that experience a sudden increase in volatility earn higher returns for a month,  only to drop and underperform during subsequent months.