The Real Deal New York

Great Depression echo

Conditions today offer eerie parallels, but don't expect new 'Hoovervilles' in New York

March 31, 2009
By Barbara Thau

It was a heady time in New York City: An increasingly affluent class fueled an unprecedented commercial and residential building boom.

Then it all crumbled. Wall Street crashed, banks failed, credit dried up, job losses surged and the sickness spread to the real estate market like a virus. New York City rents plummeted while office space sat vacant.

That downward spiral could very well describe the events of the last few months. But it also harks back to the city’s unraveling after the roaring 1920s — a cycle that culminated with the Great Depression.

The economic despair of the 1930s, and its effect on the real estate market, echo the meltdown today. Both crises narrowed the gap between the haves and the have-nots in the city, froze building construction and sent residential and commercial rents tumbling.

At the same time, sources say, we are unlikely to see the destitution that defined much of New York City during the Great Depression recur this time around.

There are marked differences, of course. The latest decimation of Wall Street has sparked a plunge in the price of condos, for example — a market that did not exist in the 1930s, when few people owned real estate and when New York was largely a manufacturing town.


The parallels of history

From a national perspective, both the Depression and today’s meltdown followed periods of exaggerated prosperity.

In the 1920s, it was industrial growth that steamrolled the economy, while this decade was propelled by the housing boom.

Both decades saw consumers living beyond their means, a factor in today’s subprime mortgage crisis. At the end of the 1920s, “Americans were living lives well furnished with debt” from the purchase of things like radios, household appliances and cars, wrote Eric Rauchway in his book “The Great Depression and the New Deal.”

Between 1930 and 1933, 9,000 banks failed, while in recent months venerable institutions like Lehman Brothers collapsed, and the government created the Troubled Asset Relief Program. Both waves of bank failures came amid deregulatory, free-market presidencies — those of Herbert Hoover and George W. Bush.

“There is quite a bit of parity between Hoover and Bush and the overarching belief in a free market that would take care of everything,” said Tom Shachtman, author of “Skyscraper Dreams” and “The Day America Crashed.”

Then, as now, credit dried up nationwide, and in New York.

Today, “there’s very little lending for building and refinancing,” said Barry Hersh, clinical assistant professor at New York University’s Schack Institute of Real Estate.

However, one critical difference is speed of response. With the $700 billion bank bailout program, the government intervened just weeks after the Sept. 29, 2008, crash, when the Dow fell 777.68 points, the largest one-day drop in history.

By contrast, it took President Hoover more than two years to relieve banks during the Depression by implementing the Reconstruction Finance Corp. — a delay that had far more severe consequences than what’s playing out today, sources say.

Another difference is the social cushions — many put in place by President Franklin D. Roosevelt as a result of the Great Depression.

“Social safety nets such as unemployment insurance and welfare did not exist,” said Andrew Jakabovics, associate director for the Economic Mobility Program at the Center for American Progress, a think tank based in Washington, D.C.

At the beginning of the Depression, there was no federal deposit insurance, which protects everyday depositors from bank failure.

“There were runs on banks and when the bank had no more money in its till, the depositors were without recourse,” Shachtman said.

Also in the 1930s, the largely immigrant population had yet to accumulate the generational wealth that exists today, experts say.

Wall Street vs. manufacturing

In the 1930s, “New York was the manufacturing capital of the country,” especially the garment center, Queens and Brooklyn, Hersh said.

“The wealthy in New York City back then were the factory owners,” Shachtman added. “The difference between the high- and the low-income earner was much thinner. It was not the 400-to-1 ratio that applies now.”

By 1932, though, half of New York’s manufacturing plants were shuttered, and one in every three New Yorkers was out of a job, according to the Lower East Side Tenement Museum.

Today, however, New York City’s economy is focused on Wall Street. According to James Brown, labor market analyst for the New York State Department of Labor, securities jobs, or employment for stockbrokers, investment bankers and the securities exchanges, accounted for 5.9 percent of all private sector jobs in New York City in 2007, and 28.2 percent of the wages.

“The trend is that the job losses appear to have a disproportionate number of high-wage earners, which has huge implications for the luxury housing market,” said Jonathan Miller, president of appraisal firm Miller Samuel.

Brown said Wall Street employment “peaked in the summer of 2007 and is down by more than 23,000 through year-end 2008. Securities wages fell by more than 22 percent between 2000 and 2003 — the last downturn. A similar drop would trim more than $16 billion from the industry’s wages. Of course, this downturn is expected to be worse than the last one.”

He added, “We have no official projection for securities job losses in 2009.”

This downturn will mean the structure of wealth will change in the city, and a door will crack open for middle-class people who have been locked out, experts say.

“You’ll have more people making money in the $100,000 to $1 million category, and not as many in the $5, $10 and $20 million category,” Shachtman said.

The pace of job losses in New York City exceeds the national average, says Celia Chen, director of housing economics for Moody’s Economy.com. “The number of employed in the New York City metropolitan statistical area declined an annualized 3.9 percent in the fourth quarter of 2008, compared to a decline of 3.6 percent in the U.S., she notes.

The job losses have already translated into falling home prices.

According to the U.S. Case-Shiller price index, home prices in the New York City metro division (which includes single-family homes and condos, although not co-ops, in the five boroughs, as well as Bergen, Passaic, Putnam, Rockland and Westchester counties), have dropped 12 percent from their peak in 2006, Chen says.

However, then, and now, rentals dominated the housing stock in the city. Today, rentals account for about 70 percent of the market, and experts say that number was notably higher in the 1930s.

The mix is important because in a downturn, the rental market reacts more quickly to the job market than the purchase market does, analysts say.

Shachtman estimates that during the Depression, rents in New York City sank between 50 and 70 percent. “There were a lot of barter deals made, or ‘let-slide’ deals like, ‘pay me something that I can cover my overhead with,’” he says. “Some rents fell to nearly zero because [landlords] needed to keep the tenants there.”

Tenants doubled up in apartments, as people moved in with family and friends.

This time around, “you certainly haven’t seen that yet,” Hersh notes.

Still, many new condos that aren’t selling are being converted into rentals, and rents are plunging, experts say.

The commercial picture

On the commercial side, the 1920s saw a building boom that marked the advent of iconic skyscrapers such as the Chrysler Building, the Woolworth Building and the Empire State Building.

As a result, between 1925 and 1931, the inventory of Manhattan office space soared by 92 percent, wrote Daniel Okrent in “Great Fortune, The Epic of Rockefeller Center.”

Back then, real estate was not a mainstream investment, but was the purview of “maverick investors,” says Robert Knakal, chairman of commercial brokerage Massey Knakal.

Many of the large buildings were bought and occupied by a single company or by real estate barons like Fred French.

When the crash came in New York, “journalists chronicled crushing vacancy rates, falling rents, unpaid taxes and interminable bankruptcy proceedings,” wrote Okrent.

The Empire State Building was famously dubbed the “Empty State Building.”

Today, says Knakal, the sale price of retail and office space in the city is off 20 to 25 percent.

Rents in the office market are down 10 to 15 percent “as a large number of people losing their jobs and gigantic businesses of all kinds are having a lot of problems,” notes Francis Greenburger, president and chief executive officer of Time Equities.

The drop in contract signings in the city is another salient indicator, and it is “unbelievably shocking,” says Jeffrey Jackson, co-founder of appraisal firm Mitchell, Maxwell & Jackson. “When I see contract signings off 75 percent, it tells me that markets are completely frozen.”


The outlook

During the Depression, squatters’ shacks, dubbed “Hoovervilles,” peppered Central Park, and there were reports of people fainting in the streets from hunger.

Even people who weren’t living in makeshift structures often found themselves in decrepit tenements. “People didn’t have stoves, bathrooms,” notes Jakabovics.

But it’s unlikely that level of impoverishment will play out with this downturn, experts say.

Like FDR, President Barack Obama is championing a populist agenda that includes a massive economic stimulus package, as well as a housing relief program that mirrors the Home Owners’ Loan Corporation established in 1933 by FDR.

And like FDR, Obama will devote “a lot of resources to the poor and middle class,” Hersh says.

Obama’s new Homeowner Affordability and Stability Plan includes refinancing aid for homeowners, new incentives for lenders to adjust the terms of subprime loans at risk of default and foreclosure, and measures to keep mortgage rates low for middle-class families looking to secure new mortgages.

But it’s the stimulus package that will likely jump-start the New York real estate market more than Obama’s home relief plan, as stemming job losses is a bigger concern here than preventing local home foreclosures, some experts say.

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