I have attached the 1929 through 1932 headlines from
during the great depression, the similarities to the
events going on today are astonishing. Interest only loans
were very popular during the twenties, they disappeared during
the great depression, only to reappear in the past five years
or so. The foreclosures are at the highest level that they
have ever been in the history of this country, and growing every
day. Please read the below article for further insight to the above
It's a good thing many of today's investors aren't
back in elementary school. In no time, they'd be diagnosed
with ADD-Attention Deficit Disorder-handed a Ritalin
prescription and told not to return until they popped a few
Whys that? Because today's investors have notoriously short
Case in point: Many look at the current real estate market certain
it "has never been like this" and "will just keep booming
indefinitely." Unfortunately, it's just this kind of
that's led to the downfall of too many investors.
Not to say that history always repeats itself /precisely/. Each age
has its own brew of conditions, excesses and personalities.
And that puts a unique stamp on current events. For the most
part, though, the past does tend to repeat. And that's because
man is a cyclical creature who can't help making the same
Especially when it comes to money.
Where am I going with this? Well…to the housing bubble.
*Interest-Only Mortgages, Then and Now*
Interest-only mortgages? ARMS? Stratospheric valuations?
These are strictly 2005 phenomena, right?
Not exactly. Although Interest-only mortgages sound so 21st Century
sophisticated, they didn't debut anywhere near 2005. The truth is,
they actually showed up before the most pivotal economic event of
the last hundred years.
That's right, the Great Depression. A recent article in the Wall
Street Journal had this to say: "Interest-only mortgages were the
*standard mortgage in the 1920s*, but they disappeared during the
Depression, and for good reason ... the drop in real-estate values
during the Depression pushed a large proportion of interest-only
loans into foreclosure. Lenders switched entirely to fully
amortizing loans, and that has been the standard mortgage loan
Like stocks, real estate was a speculative favorite of the Roaring
Twenties' investor. To control as much real estate as was humanly
possible-to leverage their money to the hilt-these "can't lose"
investors needed a mortgage device to accommodate their
aggressiveness. And interest-only mortgages filled the bill.
IO loans provided easy entry into a house: You simply paid the
mortgage interest, which freed the rest of your money for other
investments. That part of the loan usually lasted five years or so,
at which time you'd
either refinance or stay with the original terms of the agreement.
Those terms called for a reversion to a fully amortizing loan,
except now on a somewhat accelerated basis.
In other words, in the initial years of an IO loan, your money only
went toward /controlling/ the property. Not /owning/ it.
So what happened to these and other mortgages after the first Black
Monday hit on October 28th, 1929? Three things:
* First, just to survive, people withdrew their money from
* That meant banks severely curtailed their lending, and that
included refusing to refinance any
interest-only-that came due. /And that was in
calling loans in early/.
* Without the possibility of refinance-and with all that lost
from all those lost jobs-Americans faced
foreclosure, also en masses.
But that was yesterday, right? It has no actual bearing on today.
*Unless You Start Noticing The Eerie Similarities*
Since real estate remains the sole surviving mania of the wild 90s,
it stays the focus of investors. And that's led banks, like Wells
Fargo, to continue focusing on real estate investors.
Back in 2001, Wells Fargo was the first to resurrect the
interest-only mortgage. To hear the bank tell it, it wasn't because
people were desperate. "Actually, it's almost the converse of that.
Many borrowers want to take their additional cash flow and invest it
one way or another," observed Brad Blackwell, the national sales
manager for Wells Fargo Home Mortgage.
Interestingly enough, borrowers are virtually waiting in line for
these IO and adjustable rate mortgages. In fact, these mortgages
made up 63 percent of all loans originating in the second half of
*Echoes of 1929?*
*"Having" Versus "Owning"*
Maybe at the end of a prolonged cycle of prosperity, common sense
sneaks out the side door and financial insanity takes up permanent
Financial educator, Ruth Hayden calls this insanity "Yuppie Money."
"Yuppie money is, 'How far can we leverage out? How far can we cash
flow? How much stuff can we have? You know, we can get a much bigger
car with a lease, we can get a much bigger house if we're not paying
off principal, we can have much nicer furniture, we can take much
nicer trips.' It's all about the stuff."
Maybe there were Yuppies in the Roaring Twenties, too. Maybe they,
too, thought nothing would ever change their world, and that they
could just invest their way to some sort of materialistic Nirvana.
But we all know how that turned out. And it seems obvious that
today's "Yuppies" haven't learned the critical difference between
merely "having" and "owning" from their ancestors.
"When we hit the bear market after the bull market, a lot of my
Yuppie-moneyed people collapsed," Hayden continued. "They had maxed
out on margin loans, house equity, credit cards and lines of credit,
and now for the first time had to look at their lifestyles."
But that's still not the woodshed beating Americans got in October
of 1929. Unfortunately, that may yet be ahead of us.
*Real Estate Yesterday Is Real Estate Tomorrow*
Here are some 2005 similarities to the real estate picture in the
* People are overbuying and overextending. In the last three
the monthly mortgage payments for a median-value
home jumped from
$804 to $1,016. That's up over 26%. /Yet incomes
grew only 10.5%/.
A similar "throw caution to the wind"
overextension is what got so
many people in trouble after the 1929 Crash.
* According to an article on Howestreet.com, "The Housing
ability Index shows the percentage of American
households that can
afford a median home. A year ago, that index
stood at 57. Now it's
50 and falling. *This means that only one out of
two families in
the country can now afford an average dwelling.*
markets, the situation is far worse: A mere 17%
families can afford that same house."
This is what's accounting for the popularity of
adjustable-rate mortgages, where monthly costs
lower. "People see the low monthly payment, and
that is all they
care about," observed one mortgage professional.
shortsightedness is what led to so many
foreclosures in the 1930s.
Speaking of that…
* The housing boom has "a dark side-a sharp rise in
that is destroying the single greatest generator
wealth for most Americans. Foreclosure rates rose
in 47 states in
March, according to Foreclosure.com, an on line
listing service. The rates in Florida, Texas and
Colorado are more
than twice the national average. Even in New York
City and Boston,
where real estate markets are white-hot,
foreclosures are rising
in working-class neighborhoods," wrote Michael
Powell of the
"Should the nation's housing bubble deflate, as
and federal officials expect, the foreclosures
could prefigure a
national crisis," he continues, "Americans now
levels of housing debt-*more than 8 percent of
homeowners spend at
least half of their income on their
nation's housing bubble deflate, as many
economists and federal
officials expect, the foreclosures could
prefigure a national
crisis," he continues, "Americans now shoulder
record levels of
housing debt-*more than 8 percent of homeowners
spend at least
half of their income on their mortgage."*
Needless to say, foreclosures were so prevalent in the 1930s that
the word itself was hated and avoided. Some states even passed
"foreclosure moratoriums" to put the breaks on this mounting
*Housing Collapse and Gold?*
That Howestreet.com article also told of the sale of "$1 million
trailers in a mobile home park in Malibu." And that was just for the
trailers, not the land they sat on.
*No greater evidence exists that the housing boom is about to end!*
Even so, when housing does go south, will anything be around to
Maybe, in the larger picture, the question ought to be, "What will
give battered investors confidence in these scary times?" And the
answer, historically, has always been gold.
Maybe we were born knowing we should turn to gold when things turned
bad. Maybe it's in our genes, because that's what happened in the
30s. Just four years into the Great Depression, *gold had risen
Of course, Washington had confiscated the precious metal in 1933.
Maybe it instinctively knew enough to turn to gold, too.
But man truly is a cyclical creature. With some gold in our
portfolios, though, our cycles can turn to boom instead of bust.
September 15, 2005
Depression 1929-1932 Headlines:
is no cause to worry. The high tide of prosperity will continue.”
Andrew W. Mellon, Secretary of the Treasury.
“Secretary Lamont and officials of the Commerce Department today
denied rumors that a severe depression in business and industrial
activity was impending, which had been based on a mistaken
interpretation of a review of industrial and credit conditions
issued earlier in the day by the Federal Reserve Board.”
– New York Times
Stock market crash
“The Government’s business is in sound condition.”
Andrew W. Mellon, Secretary of the Treasury
“Maintenance of a general high level of
business in the United States during December was reviewed today by
Robert P. Lamont, Secretary of Commerce, as an indication that
American industry had reached a point where a break in New York
stock prices does not necessarily mean a national depression.”
– Associated Press dispatch.
“Reports to the Department of Commerce indicate that business is
in a satisfactory condition, Secretary Lamont said today.”
“Definite signs that business and industry have turned the corner
from the temporary period of emergency that followed deflation of
the speculative market were seen today by President Hoover. The
President said the reports to the Cabinet showed the tide of
employment had changed in the right direction.”
– News dispatch from Washington.
“Trade recovery now complete President told. Business survey
conference reports industry has progressed by own power. No
Stimulants Needed! Progress in all lines by the early spring
York Herald Tribune.
“President Hoover predicted today that the worst effect of the
crash upon unemployment will have been passed during the next sixty
“While the crash only took place six months ago, I am convinced
we have now passed the worst and with continued unity of effort we
shall rapidly recover. There is one certainty of the future of a
people of the resources, intelligence and character of the people of
the United States – that is, prosperity.”
“The worst is over without a doubt.”
– James J. Davis, Secretary of Labor.
“American labor may now look to the future with confidence.”
James J. Davis, Secretary of Labor.
have hit bottom and are on the upswing.”
– James J. Davis, Secretary of Labor.
“Looking to the future I see in the further acceleration of
science continuous jobs for our workers. Science will cure
Charles M. Schwab.
“President Hoover today designated Robert W. Lamont, Secretary of
Commerce, as chairman of the President’s special committee on
“President Hoover has summoned Colonel Arthur Woods to help place
2,500,000 persons back to work this winter.”
– Washington dispatch.
“I see no reason why 1931 should not be an extremely good year.”
Alfred P. Sloan, Jr., General Motors Co.
“The country is not in good condition.”
“The depression has ended.”
Julius Klein, Assistant Secretary of Commerce.
“Henry Ford has shut down his Detroit automobile factories almost
completely. At least 75,000 men have been thrown out of work.”
– The Nation.
“I believe July 8, 1932 was the end of the great bear market.”
Dow Theorist, Robert Rhea.