Post #341: Recession

Posted on August 9, 2019

The recent dips in the stock market got me asking how the next recession might affect the Town of Vienna, including property values and tax revenues.  This is my first look at how Vienna compared to the U.S. during the last recession.  The question I am eventually working toward how the Town of Vienna revenues changed during and following the last recession.

In 2008, the US very nearly suffered a collapse of its financial system.  And as time passes, we tend to for get that.  Because, in the end, the various Federal rescue efforts — and deposit insurance — were successful.  For now, at least, we still have a banking system, and housing prices have large recovered.

The first section briefly reviews the national impact of the 2008 financial collapse, the second section looks specifically at DC and Vienna housing prices. 

Aftermath of the collapse, nationally.

First, to be clear that we’re on the same page regarding “near collapse of the financial system”, let me start with a graph of bank failures in the U.S.  This graph, courtesy of the Federal Deposit Insurance Corporation (FDIC), show the surge in failures that occurred in 2008 and 2009.  In 2008, despite significant intervention by the Federal Reserve to try to stabilize the financial system, banks with assets amounting to more than a third of a trillion dollars failed.

While that looks large on the graph, and was substantial, that has to be compared to a total insured asset base of around $10 trillion, at that time.  So outright commercial bank failures were limited to about 3% of all FDIC insured assets in 2008, and perhaps 5% for the entire time period.

In addition to a wave of bank failures, the collapse of the sub-prime mortgage bubble led to a sharp downward adjustment in US housing prices, of a sort that had not been seen in the US for generations.  The blue line below (from the Saint Louis Federal Reserve) shows an index of U.S. housing prices.  The hump, peaking around 2006, is “the housing bubble”.  The  red line, for reference, is the US Consumer Price Index.  The graph runs from 1975 at the left, the 2019 at the right.  The gray bars are recessions.

Prices have very nearly recovered their 2006 peak level, in inflation-adjusted terms.  Inflation-adjusted, US housing prices are just 7% below the 2006 peak (using the all-transactions index shown above).   The more accurate Case-Shiller index (not shown), which accounts for change in the mix of housing stock over time, shows current inflation-adjusted U.S. housing prices as 9% below the 2006 peak.

Here’s the unemployment rate, on the same time scale, again from the Saint Louis Federal Reserve.  The last peak on the graph is showing that unemployment shot up in the recession that followed the collapse of the bubble, maxing out around 10%.  It has since recovered to about three-and-a-half percent, which, as you can clearly see, is quite low by historical standards.

Finally, there was a sea-change in the Federal deficits and debt at this point.  For a variety of technical reasons, the exact definition of total federal debt is hard to pin down.  But here’s what the the Saint Louis Federal Reserve shows for federal debt as a percent of Gross Domestic Product (GDP).  The 2008 recession was accompanied by a short, steep rise in federal debt, with no move toward paying that down in the following non-recessionary period.

And, correspondingly, here’s the annual budget deficit as percent of GDP.   At the peak of the recession, the Federal deficit was 10 percent of GDP.  And while that narrowed as the recession ebbed, deficits began increasing again after 2015.  (Just as a historical note, that tiny little portion of the curve above the X-axis (budget surplus!) was the result of a lengthy period of fiscal responsibility overseen Presidents Bush Sr. and Clinton.)


Local impact.

First, the wave of bank failures in the 2008-2010 period largely skipped the Washington DC area.  Looking at banks that closed in 2008 – 2010 , only three small Maryland banks and two small Virginia banks closed.  The closest thing we had to a local bank failure was the Greater Atlantic Bank in Reston.

Second, consistent with our long history of mild local recessions, DC-area unemployment never came close to matching the national unemployment rate of 10%.  At the peak of the 2008+ recession, unemployment in the DC area peaked around 6.5 percent.  Still, that was the highest unemployment rate this area had seen for at least a generation.  (The data below are from the U.S. Bureau of Labor Statistics.)

Finally, the drop in house prices that affected the U.S. definitely hit the Washington DC area, but Vienna was not-quite-untouched.

In terms of housing prices, to find non-copyrighted housing price data for small areas, I turned to the Federal Housing Finance Agency’s house price index data.   Many of these indices are “experimental”, so the quality of the information is not assured.  But they tell an interesting story about Vienna versus the rest of the DC area.

What follows here are three graphs, all for the 1991 to 2018 (or 2019) period, showing an index of house prices:  DC metro area, three-digit zip 221xx, and five digit zip 22180.   Note how the size of the bubble, and the following price crash, both diminish as zoom in from the DC metro area as a whole, to housing in ZIP code 22180.

You get much the same picture of the housing values in the Town of Vienna if you look at total assessed values, as published in the Town budget each year, in the “Profile” section.  Assessed values include both price changes and changes in the stock of housing (i.e., the tear-down-boom), but the Town’s number show much the same story as the price graph above.  The only fallout from the bursting of the sub-prime mortgage bubble was a slight and temporary decline in total assessed values.

The upshot of this is that the Town of Vienna was far less affected by the housing bubble — and subsequent bust — than the US as a whole, the DC metro area, or even the three-digit ZIP code area 221xx.    No bank failures to speak of, only a modestly elevated unemployment rate in the area, and instead of a sharp drop in prices, we had what I would characterize as a decade of more-or-less stagnant home prices in nominal terms, and increasing total assessments due, at least in part, to the replacement of smaller houses with much larger houses.