Housing and Mortgage Markets in Historical Perspective

Eugene N. White, Kenneth Snowden, Price V. Fishback, Eugene N. White, Kenneth Snowden, Price V. Fishback

• Publisher: University of Chicago Press
• Year: 2014
• Print ISBN: 9780226073842
• eBook ISBN: 9780226093284
• Topic: Business
• Subtopic: Business General
• Index: Business

The central role of the housing market in the recent recession raised a series of questions about similar episodes throughout economic history. Were the underlying causes of housing and mortgage crises the same in earlier episodes? Has the onset and spread of crises changed over time? How have previous policy interventions either damaged or improved long-run market performance and stability?

This volume begins to answer these questions, providing a much-needed context for understanding recent events by examining how historical housing and mortgage markets worked—and how they sometimes failed. Renowned economic historians Eugene N. White, Kenneth Snowden, and Price Fishback survey the foundational research on housing crises, comparing that of the 1930s to that of the early 2000s in order to authoritatively identify what contributed to each crisis. Later chapters explore notable historical experiences with mortgage securitization and the role that federal policy played in the surge in home ownership between 1940 and 1960. By providing a broad historical overview of housing and mortgage markets, the volume offers valuable new insights to inform future policy debates.

1

A Historiography of Early NBER Housing and Mortgage Research

Kenneth Snowden*

As the United States grew rapidly and urbanized between 1870 and 1930, nonfarm residential construction and home mortgage debt became increasingly important to the nation’s capital formation, financial structure, and short-run aggregate performance. However, both activities remained highly localized, institutionally diverse, and unevenly regulated during this period. As a result, residential construction and mortgage credit were poorly measured and largely unexamined before 1930. This all changed during the Great Depression when the federal government responded to the worst housing and mortgage crisis in the nation’s history with a five-year burst of regulatory initiatives. Some of these were temporary, emergency interventions, while others permanently transformed the nation’s homebuilding and residential mortgage lending sectors. These interventions created a more institutionally mature and integrated national housing market, and provided new sources of data and opportunities for research.

The National Bureau of Economic Research (NBER) played a central role in the academic discussion of residential construction and mortgage finance that blossomed over the next quarter century.¹ Between 1935 and 1960, the NBER sponsored six distinct research programs that produced thirteen major monographs examining the performance and transformation of the housing and mortgage markets. The appendix to this chapter provides a complete enumeration of these contributions. When viewed collectively, these works provide a broad and deep analysis of residential construction and financing before World War I, through the boom and bust of the interwar years, and during a remarkable post–World War II expansion. To set the stage for the discussion of these early NBER research initiatives, we begin with a brief account of the development of the housing and mortgage markets between 1920 and 1950.

1.1 Setting the Stage: Housing and Home Mortgages, 1920–1950

The earliest formal investigation of the US housing market was conducted by the Calder Committee, created by US Senate Resolution 350 that was passed on April 17, 1920.² The committee was asked to make legislative recommendations to respond to the acute excess demand for housing that had developed by the end of World War I. The committee’s first observation in its final report was that private enterprise, rather than public intervention, should be relied on to alleviate the imbalance.³ At the time, this recommendation was more than a generic endorsement of free markets. It was, instead, a response to groups of architects, labor organizations, and even the military services who, at the time, advocated for the continuation, and even the expansion, of wartime federal housing programs that had originally been established for defense workers (Wood 1931, 76, 8). Moreover, by this time, several European countries had established public housing programs to address their own postwar housing problems. The Calder Committee examined the foreign programs and gave particularly harsh assessments of the British and French initiatives.⁴ In the end, the federal wartime housing programs were soon discontinued.

Although skeptical of direct federal intervention in the housing market, the Calder Committee recognized the inadequacies in the nation’s housing stock and recommended the implementation of a set of public programs and policies for the purpose of assisting, rather than replacing, private market initiatives and local governments. The first was to compile and maintain a comprehensive statistical record of national building activity. In response, the Bureau of Labor Statistics (BLS) took over a small program from the US Geological Service to collect annual building permit series from local governments. Beginning in 1921, the BLS used these data to compile an annual report of planned nonfarm construction activity in 257 principal cities. The Calder Committee also endorsed federal sponsorship of a national clearinghouse for information about residential zoning regulation and building standards that varied widely across local markets. The Division of Building and Housing in the Department of Commerce was charged with compiling this information and, in 1926, began to publish Zoning Progress in the United States to inform local governments and their constituents about new and best practices within the urban planning community (Hubbard and Kimball 1929, 162–63).

The Calder Committee identified the residential mortgage market as a third area where federal policy could make a positive contribution. It recommended a relaxation of strict prohibitions on urban mortgage lending by nationally chartered commercial banks—and policies that did so were gradually adopted during the 1920s. The committee also gave its support for proposals to establish a new Federal Home Loan Bank (FHLB) system that could provide liquidity and oversight for residential mortgage lenders in much the same way as the recently created Federal Reserve and Federal Farm Loan Bank systems were doing for commercial banks and farm mortgage lenders. The proposal was championed by, and designed to assist, building and loan associations, which at the time were the nation’s leading institutional residential mortgage lenders and the only ones that specialized in home mortgages. The proposal foundered when other mortgage lenders—mutual savings banks, life insurance companies, and state banks—strongly opposed the new system. These latter groups prevailed, and the federal government continued to play a small role during the 1920s in a residential mortgage market that remained fragmented in structure and subject to a patchwork of state regulation.

The Calder Committee’s confidence in the productive capacity of the private housing sector was borne out as the nation’s postwar housing demands were soon satisfied by a historic building boom. After averaging just over 300,000 nonfarm housing starts between 1905 and 1916, production reached a peak of more than 700,000 units in 1925 and averaged more than 600,000 units per year between 1921 and 1928. Ultimately, 8 million new housing units were added to an initial stock of 24 million during the 1920s, as the nonfarm homeownership rate surged from 41 to 46 percent. Because the BLS began to record housing starts as the committee had recommended, we know that the jump in building occurred in all regions of the country, in both single- and multifamily markets, and especially in the new suburban ring areas of metropolitan areas (Kimbrough and Snowden 2007). Additionally, the discussion of housing regulation and building standards intensified during this period as groups such as the National Housing Association, the Better Homes movement, and the National Association of Real Estate Boards promoted new policies and approaches as the physical layout of US cities were being transformed by increased density and suburbanization (see Veiller 1929).⁵

The home mortgage market of the 1920s grew even more rapidly than the nonfarm housing stock, with nonfarm residential debt tripling (from $9 to $30 billion) in less than a decade as the ratio of debt to residential wealth doubled to nearly 30 percent (Snowden 2010). The credit was supplied by a diverse set of lenders. Life insurance companies and mutual savings banks expanded their mortgage portfolios rapidly, while building and loans (B&Ls) grew both in number and size and spread geographically. At the same time, two new innovations—private mortgage insurance and two early forms of mortgage securitization—served noninstitutional investors, who remained the largest single source of residential mortgage credit.⁶ Lenders of second mortgages also appeared in great numbers during the lending boom to provide borrowers with the opportunity to purchase homes with smaller down payments than the 40 to 50 percent generally required by first mortgage lenders. Besides requiring low loan-to-value ratios, these first mortgage contracts also differed from the familiar long-term, amortized modern mortgage loan by being short in term and structured as balloon or sinking-fund loans. Despite the rapid growth and innovation, by the end of the 1920s, the American home mortgage market remained highly localized, regionally fragmented, and institutionally immature relative to modern standards.⁷

One sign of the federal government’s “hands off” attitude toward the home mortgage market during the 1920s, and a development that continues to this day to impair our understanding of the mortgage lending boom of the 1920s, was the Census Bureau’s decision to remove the question regarding home mortgages from the 1930 population census form, even though it had regularly been asked since 1890. As a result, we do not know with any precision the role that mortgage credit played during one of the greatest homebuilding booms in US history. The federal indifference ended quickly, however, when the 1920s housing expansion turned into a severe and protracted foreclosure crisis in 1930. The change was signaled by President Hoover’s decision to organize a national housing conference in the summer of 1931. The purpose of this conference was to provide a comprehensive examination of the state of the nation’s housing and mortgage markets (Gries and Ford 1932a, 2).

Hoover enlisted more than five hundred housing professionals, experts, and practitioners—organized into twenty-five different subcommittees—to collect and assess information on topics as diverse as planning and zoning, house design and construction, slums and large-scale housing, and home improvement and repair. These reports were transformed into an eleven-volume conference report that provides a remarkable, detailed, and comprehensive snapshot of the state of US homebuilding and finance in 1930. However, by the time the participants convened as a group in December 1931, the discussion focused on the economic crisis and a mortgage credit system that was identified as “the greatest hindrance” to progress toward the national goal of increasing homeownership (Gries and Ford 1932b, 9).

Conference participants identified several problems in home mortgage lending: high interest rates that varied substantially across the country, contracts that were short in term and renewable only with additional costs, and the widespread use of second liens. To address the rising number of foreclosures, the conference endorsed Hoover’s plan to revive the Calder Committee’s recommendation for a federal home loan discount bank. Just as in the early 1920s, banks and life insurance companies opposed the creation of such a system because it was structured to serve the building and loan industry.⁸ The proposal succeeded this time, and the Congress passed the Federal Home Loan Bank Act on July 22, 1932. Its advocates argued that the new system was established “not only to relieve the present financial strain . . . but [to] have permanent value . . . as a means of promoting home ownership in the future.”⁹

The Federal Home Loan Bank system began operation in the spring of 1932, but, as its critics had warned, it was designed for, and used only by, building and loan associations. While the FHLB system was successful in gradually transforming B&Ls into the modern savings and loan industry, it proved to be incapable of stemming the general mortgage crisis of the early 1930s. Against this backdrop, Roosevelt promoted several initiatives between 1933 and 1935 that immediately addressed the mortgage crisis and permanently changed the market’s institutional structure. The first was the Home Owners’ Loan Corporation (HOLC), which was proposed in the spring of 1933 “[t]o provide emergency relief with respect to home mortgage indebtedness, to refinance home mortgages, [and] to extend relief to owners of homes . . . who are unable to amortize their debt elsewhere.”¹⁰ The HOLC was a publicly owned entity that purchased one million defaulted home mortgage loans from private lenders between 1933 and 1936 and refinanced them on a long-term, low interest basis. Along with the HOLC, Congress created a new system of federal savings and loan (S&L) charters, and even more support for the new S&L industry came when the Federal Savings and Loan Insurance Corporation was created in 1935. The other major New Deal initiative was the Housing Act of 1934, which created the Federal Housing Administration (FHA) and its program to insure long-term, low down payment, amortized mortgages. The volume of FHA lending was disappointingly small at first, but grew robustly after the Federal National Mortgage Association (the FNMA or “Fannie Mae”) was created in 1938 to support a secondary market for these insured loans.

Five years of New Deal legislation forged a new framework through which housing was built and financed in the United States for the next three decades. Savings and loan associations served local mortgage markets and small-scale builders; commercial banks and mortgage companies used FHA and VA loans to finance large-tract builders and multifamily projects; and life insurance companies and mutual savings banks dominated the interregional residential mortgage market through networks of dedicated mortgage companies. Within this structure, institutional portfolio lenders came to dominate the residential mortgage market as never before or since; regulatory boundaries limited competition among lender groups; financial innovation was deemphasized; and loan origination, servicing, and credit risk management were integrated within single or small networks of institutions. A historic surge in both homebuilding and homeownership was financed through this new structure during the post–World War II era, and the research programs of the NBER documented both its institutional structure and its accomplishments.

1.2 The Early NBER Housing Programs

The National Bureau of Economic Research was a decade old when the Great Depression presented the young organization with both opportunities and challenges. Survival was foremost among the latter—a significant loss of external support in 1932 forced the NBER to suspend several research programs and to contemplate dissolution.¹¹ Even after the severe fiscal challenges were resolved in 1933, the NBER still had inadequate resources to maintain its research agenda into general features of economic life—including the measurement of national income, wholesale prices, and industrial p...

Table of contents

• Cover
• Copyright
• Title Page
• Series Page
• National Bureau of Economic Research
• Relation of the Directors to the Work and Publications of the National Bureau of Economic Research
• Contents
• Acknowledgments
• Introduction
• 1. A Historiography of Early NBER Housing and Mortgage Research
• I. Housing and the Interwar Business Cycles
• II. A Closer Look At the Interwar Housing Crisis
• III. Securitization in Earlier Times
• IV. Postwar Housing Policies
• Notes
• Contributors
• Author Index
• Subject Index