Alexander J. Field, Santa Clara University
The Interwar Housing Cycle in the Light of 2001-2011: A Comparative Historical Approach
Field examines the interwar housing cycle in comparison to what transpired in the United States between 2001 and 2011. The 1920s saw a boom in construction and prolonged retardation in building in the 1930s, resulting in a swing in residential construction's share of GDP, and its absolute volume, that was much larger than what has taken place in the 2000s. In contrast, there was relatively little sustained movement in the real price of housing between 1919 and 1941, and the up-and-down price movements were remarkably modest, certainly in comparison with more recent experience. Field documents the higher degree of housing leverage in 2001-11 and considers its implications for understanding price movements and the different mechanisms whereby housing busts can and have contributed to inducing or prolonging an economic downturn.
Daniel K. Fetter, Wellesley College and NBER
How Do Mortgage Subsidies Affect Home Ownership? Evidence from the Mid-Century GI Bills (NBER Working Paper No. 17166)
The sharpest increase in U.S. home ownership over the last century occurred between 1940 and 1960, associated primarily with a decrease in the age at first ownership. To shed light on the contribution of several coincident large-scale government interventions in housing finance, Fetter examines veterans' home loan benefits provided under the postwar GI Bills. He uses two breaks in the probability of military service by date of birth, for cohorts coming of age at the end of World War II and the Korean War, to estimate the impact of veteran status on home ownership. He find significant, positive effects of veteran status on home ownership in 1960. Consistent with a model in which the impact of easier loan terms declines with age, these effects are larger for younger veterans and diminish in 1970 and 1980 as the cohorts age. Complementary evidence suggests veterans' non-housing benefits and military service itself are unlikely to explain the observed differences in home ownership. Veterans' housing benefits appear to have increased aggregate home ownership rates primarily by shifting purchase earlier in life; they can explain approximately 7.4 percent of the increase in aggregate home ownership from 1940 to 1960, and 25 percent of the increase for the affected cohorts.
Carlos Garriga, Mathew Chambers, and Donald Schlagenhauf, Federal Reserve Bank of St. Louis
Did Housing Policies Cause the Post-War Boom in Homeownership? A General Equilibrium Analysis
Chambers, Garriga, and Schlagenhauf seek to understand the sources of the boom in home owner ship between 1940 and 1960. The increase over this period was five times larger than the recent episode in 1996-2004. In the post-depression period, the government opted to intervene and regulate housing finance, provide assistance programs (through the Veterans Administration), and change tax provisions towards housing. The result was a change in the maturity structure of mortgage loans, down payment requirements, and increases in credit. In addition, the economy underwent important changes in demographic structure, especially the income distribution. The relative importance of these different driving forces is analyzed here using a quantitative general equilibrium overlapping generation model with housing. The parameterized model is consistent with key aggregate and distributional features in the United States in 1940. In contrast to the recent episode, income and demographics are crucial in accounting for the increase in homeownership. Essentially, the level and shape of income over the life cycle are a precondition for the government reforms in housing markets and housing finance playing an important role in generating an increase in aggregate home ownership. The increase in life expectancy and the shift in the distribution of the age cohort also had a significant effect on the demand for housing.
William Goetzmann, Yale University and NBER, and Rik Frehen and Geert Rouwenhorst, Yale University
Financial Innovation in Late-Eighteenth Century Netherlands:The Case of American Land Securities
The end of the 18th century was one of the most innovative periods in the history of securitization. In The Netherlands, a network of merchant investment bankers developed sophisticated methods for structuring loans based on overseas properties as collateral. In 1793, the Holland Land Company issued two structured notes to purchase millions of acres in Western New York. In 1794 the purchase and development of property in the newly-designated capital city of Washington D.C. was financed by mortgage-backed bonds underwritten by Dutch merchants. Frehen, Rouwenhorst, and Goetzmann show how these securities built on previous fixed-income instruments that had been used to finance trade and to speculate in the debt of the United States. The difference in the land securities is that they were used to finance projects that yielded no revenues in the short term and took decades to realize value.
Kirsten Wandschneider, Occidental College
Lending to Lemons: Landschafts-Credit in 18th century Prussia
Wandschneider describes the emergence of credit cooperatives, called 'Landschaften' and with it the birth of covered bonds in 18th century Prussia. Landschaften facilitated the refinancing of loans for Prussian estates by issuing covered bonds (Pfandbriefe) that were jointly backed by their members. They relied on a cooperative structure, joint liability, and local administration to overcome asymmetric information problems related to lending. Their emergence serves as an example for financial innovation in historical mortgage markets.
Jonathan Rose, Federal Reserve Board
The Prolonged Resolution of Troubled Real Estate Lenders During the 1930s
Rose notes that building and loan associations (B&Ls) in Newark, New Jersey collectively suffered a set of severe balance sheet shocks to their mortgage lending businesses during the Great Depression. Resolution was postponed as regulators were unwilling to take large-scale action, and as laws were revised to allow for indefinite withdrawal restrictions. Many associations were frozen for nearly a decade, suffering from illiquidity but reluctant to raise cash by selling assets at a loss. In the medium run, a market-based resolution mechanism developed in the form of a secondary market for B&L equity share liabilities. Shareholders barred from withdrawal incurred large losses on this market. At the same time, B&Ls used the market to avoid realizing some losses by exchanging foreclosed real estate for their second-hand share liabilities. More formal resolution ultimately took place from 1938 to 1943, first consisting heavily of closures, and then of reorganizations in 1942 and 1943. Reorganizations were spurred by a large scale federal intervention arranging for liquidity injection and liability insurance, and by higher real estate prices during the run up to World War II.
Steven Gjerstad and Vernon Smith, Chapman University
Prosperity and Recession: U.S. Economic Cycles and Consumption Cycles During the Past Century
Michael Brocker, Booz, Allen, Hamilton, and Christopher Hanes, Binghamton University
Effects of the 1920s American Real Estate Boom on Housing Markets in the Downturn of the Great Depression: Evidence from City Cross Sections
Brocker and Hanes note that in the 1929-33 downturn of the Great Depression, house values and homeownership rates fell more, and mortgage foreclosure rates were higher, in cities that had experienced relatively high rates of house construction in the residential real estate boom of the mid-1920s. Across the 1920s, boom cities had seen the biggest increases in house values and homeownership rates. These patterns suggest that the mid-1920s boom contributed to the depth of the Great Depression through the wealth and financial effects of falling house values. Also, they are very similar to cross-sectional patterns across metro areas around 2006. Thus, they are evidence that the boom of the 1920s and the boom of the 2000s had fundamentally similar causes and mechanisms.
Trevor Kollmann, LaTrobe University
Built with Good Intentions? An Examination of Public Housing Projects on Local Communities
Out of the programs that were created during the Great Depression, the introduction of public housing has been one of the most controversial. A myriad of recent papers including Hartley (2010) and Shester (2010) have found public housing is associated with higher crime rates and worse health outcomes in the modern era. However, it is not clear that the first public housing projects had the same effect on the surrounding community. Housing conditions for low-income families during the 19th and the first few decades of the 20th were generally poor. Wood (1919, pp. 7-9) argues that as many as a third of all families across the United States resided in housing that was overcrowded and had insufficient light and water. She argued that many dwellings were also dilapidated and were prone to fire. Several cholera epidemics occurred in 1832, 1849, and again in 1852 in lower Manhattan as a result of crowded living conditions. Kollmann explores how housing officials selected the location of public housing and then measures the effect of public housing on surrounding contract rents in New York City between 1934 and 1940. He constructed a unique dataset of public housing projects in New York City and combined it with census tract-level data from the 1934 Real Property Inventory of New York City and the 1940 United States Census, the latter obtained from the National Historical Geographic Information System (NHGIS). To determine how officials selected the locations of public housing, he ran several probit models and explored the average marginal effects across boroughs. In addition, he ran a series of hedonic models incorporating "locational heterogeneity", described in Páez, Uchida, and Miyamoto (2002), to explore the influence of public housing on the distribution of contract rents in the surrounding communities. These models use a locally-linear estimator similar to Geographically Weighted Regressions, but they also allow the bandwidth to vary for each location. Kollman finds that public housing in New York City was constructed in crowded neighborhoods in which families typically shared restroom facilities. Moreover, public housing was targeted in neighborhoods whose residents were largely reliant on public transportation. Building in neighborhoods with low property values appears to have been a relevant, but not an overwhelming factor. My findings also suggest that public housing increased the share of contract rents throughout the city. The magnitude of the effect also appeared to not dissipate as the distance to public housing increased. However, these results suggest that the early public housing projects constructed by the Public Works Administration led to greater spillovers in contract rents than the later projects constructed by the United States Housing Authority. This may indicate that the cost-cutting measures of the USHA and future housing authorities paved the way for the eventual decline of public housing in cities.