Published by EH.Net (April  2015)

Eugene N. White, Kenneth Snowden, and Price Fishback, editors, Housing and Mortgage Markets in Historical Perspective. Chicago: University of Chicago Press, 2014. ix + 397 pp. $110 (cloth), ISBN: 978-0-226-07384-2.

Reviewed for EH.Net by William J. Collins, Department of Economics, Vanderbilt University.

In the aftermath of the recent financial crisis and “great recession,” there is renewed interest in the connections between housing markets, mortgage finance, financial institutions, and the macroeconomy.  Economic historians have engaged this discussion by offering trenchant comparisons between recent events and the American experience in the years before and during the Great Depression, as well as perspective on the evolution of institutions, financial instruments, and policies that played important roles in the recent crisis and ensuing policy debates.  The chapters in Housing and Mortgage Markets in Historical Perspective were written with an eye toward the recent crisis, sometimes engaging it directly and at length but more often using it as motivation for a detailed study of a particular aspect of economic history.  They succeed individually and as a multifaceted group of independent studies, in which authors often cross-reference one another’s arguments and findings.  There is much to be learned here.  Even readers who are experts in some areas covered by this volume will find their horizons expanded by the studies’ collective range and depth.

Eugene N. White (Rutgers University), Kenneth Snowden (University of North Carolina at Greensboro) and Price Fishback (University of Arizona) edited the volume, which emerged from a conference sponsored by the National Bureau of Economic Research in 2011.  It consists of an introduction and eleven chapters, most of which focus on the United States.  The volume is divided into four main sections.  Prior to Section I, however, Snowden provides a concise rendering of “A Historiography of Early NBER Housing and Mortgage Research” (chapter 1).  Housing markets and mortgage finance were an important feature of the NBER’s research programs from the 1930s to the 1960s, resulting in several volumes that have provided the intellectual bedrock for long-run perspectives on such topics.  Snowden’s chapter reviews the landmark studies in the NBER series and will serve as a valuable starting point for anyone who is beginning historical research on U.S. housing and mortgage finance.

The volume’s first section is on “Housing and the Interwar Business Cycle,” featuring chapters by Alexander J. Field (chapter 2), Steven Gjerstad and Vernon L. Smith (chapter 3), and Eugene N. White (chapter 4).  Field’s chapter, “The Interwar Housing Cycle in the Light of 2001-2012,” fully engages comparisons of the interwar experience and the more recent rise and fall of the housing market, as well as the macroeconomic implications of the housing cycle in different historical contexts.  Field carefully delineates the similarities and differences between the periods.  He argues that paying more attention to bank and household balance sheet issues may enrich our understanding of the Great Depression, as it has for the recent crisis, but he emphasizes that for many reasons (e.g., housing was less leveraged in the 1920s) the housing sector likely played a smaller and different role in the run up to the Depression than it played in the 2001-12 period.

Gjerstad and Smith’s chapter on “Consumption and Investment Booms in the 1920s and Their Collapse in the 1930s” develops an argument that differs from Field’s in its degree of emphasis on the importance of losses on residential real estate to the Great Depression.  Gjerstad and Smith describe several channels through which a decline in real estate values would plausibly affect economic activity, both then and now.  For instance, a decline the value of housing would lead households cut back on durable goods purchases and firms to cut back on production and employment, which in turn affects households’ income and ability to repay mortgage debt, which in turn affects bank balance sheets and lending, and so on.  Perhaps future research that explicitly models and measures the channels of influence connecting housing, financial markets, and macroeconomic aggregates throughout the 1920s and 1930s would help bridge the competing historical interpretations of Field and Gjerstad and Smith.

White’s “Lessons from the Great American Real Estate Boom and Bust of the 1920s” focuses on explaining why the housing-market collapse in the 1920s did not lead to a banking crisis despite having many similarities to the mid-2000s housing collapse that caused serious instability in the financial sector.  After reviewing and comparing the rise and fall of construction and housing prices during the two periods, White assesses the roles of the Federal Reserve, changes in lending standards and securitization, risk-taking by financial institutions, deposit insurance, and bank supervision.  At the risk of oversimplifying White’s narrative, it seems clear that the institutional environment of the 1920s did not lead banks to take on the same level of risk that financial institutions did in the 2000s.  As White puts it, “When the bust came, large losses did not accrue to them [banks in the 1920s]; and the most risky securitized mortgages were held by investors, not leveraged financial institutions” (p. 154).

The volume’s second section is “A Closer Look at the Interwar Housing Crisis,” with chapters by Michael Brocker and Christopher Hanes (chapter 5), Price Fishback and Trevor Kollmann (chapter 6), and Jonathan D. Rose (chapter 7).  Brocker and Hanes examine data for a cross section of cities, documenting the size of the boom in construction, home ownership, and home values during the 1920s, especially the mid-1920s, and find a correlation with the size of post-1930 collapse in local housing markets.  In addition to standard census-based information, the authors rely on data from the “Financial Survey of Urban Households” and the “Real Property Inventory,” which were collected in 1934 and include useful retrospective information.  They interpret the patterns as being consistent with a mid-1920s bubble that varied across places and that had not fully adjusted before the onset of the Great Depression.

Fishback and Kollmann’s chapter, “New Multicity Estimates of the Changes in Home Values, 1920-1940,” is the best guide to inter-war housing price data that I have read.  They draw on a variety of sources to trace the trajectory of prices over this period.  Importantly, they find patterns that diverge significantly from those in the series that Robert Shiller (2005) created by combining a particular series from Grebler, Blank, and Winnick (1956) with an index of asking prices for five cities for 1935-53.  This chapter should be the starting point for anyone whose research requires information on housing price dynamics during the interwar years.

In chapter 7, “The Prolonged Resolution of Troubled Real Estate Lenders during the 1930s,” Jonathan Rose describes the slow unwinding of troubled Building and Loan associations (B&Ls) through a detailed case study of Newark’s associations, which fell in number from 499 in 1930 to 55 in 1945.  A fascinating part of the story is that withdrawal restrictions at B&Ls led to the development of a secondary market in B&L shares that, in a roundabout way, helped clear the housing market.  Rose explains how B&L shareholders who sold on these markets realized significant losses compared to more patient shareholders.  Rose also examines variation in reported share prices (circa 1939-40), and then goes on to describe two waves of B&L resolutions, through liquidation or reorganization, in the late 1930s and early 1940s.

The volume’s third section consists of two studies of “Securitization in Earlier Times,” written by Rik Frehen, William N. Goetzmann, and K. Geert Rouwenhorst (chapter 8) and Kirsten Wandschneider (chapter 9).  Frehen, Goetzmann, and Rouwenhorst describe “Dutch Securities for American Land Speculation in the Late Eighteenth Century,” with a focus on financial instruments in the 1790s that financed land purchases in Washington, D.C. and New York State.  “Negotiaties” were complex debt securities that in essence provided claims on future land sales.  The authors review the history of related financial instruments in Dutch markets before describing the fate of the investments in Washington (a failure) and New York (a limited success).  The reorganization of the New York debt into an equity-like instrument was critical to the venture’s relative success, and it demonstrates the inadequacy of debt instruments in a setting where development and gains from land sales were slow to materialize.

The chapter by Wandschneider, “Lending to Lemons: Landschaft Credit in Eighteenth-Century Prussia” is an outlier in the best sense.  Eighteenth-century Prussia is far removed from the context of most of the papers in the volume.  Yet the fundamental economic themes are highly relevant to volume’s discussion, and the institutions created in Prussia in response to inherent problems of mortgage finance are a potent reminder of the value of going abroad to gain a novel perspective.

The volume’s last section, “Postwar Housing Policies,” includes work by Daniel K. Fetter (chapter 10) and Matthew Chambers, Carlos Garriga, and Don E. Schlagenhauf (chapter 11).  Fetter’s chapter, “The Twentieth-Century Increase in Home Ownership: Facts and Hypotheses,” begins by laying out a series of first-order facts about the mid-century rise in U.S. homeownership, viewed from time-series, city-level, age-specific, and cohort-specific perspectives.  The steep rise in ownership after 1940, especially for relatively young men, corresponds to both a decline in renting and a decline in living with relatives.  The rise in ownership was widespread, occurring in every region and in rural and urban areas, though not uniform in magnitude.  He then assesses several hypotheses about the rise in ownership, placing emphasis on demographic factors and changes in mortgage finance while noting that stronger evidence could be developed to address other plausibly important channels, such as rising income and the changing tax code.

Chambers, Garriga, and Schlagenhauf’s chapter, “Did Housing Policies Cause the Postwar Boom in Home Ownership?” takes a different approach to studying homeownership, placing the tenure decision in the context of a dynamic general equilibrium model where government intervention affects ownership through the tax code and mortgage market institutions.  Once the model is parameterized to match key properties of the economy observed between 1935 and 1940, the authors can conduct counterfactual policy experiments for the post-1940 period such as changing the tax treatment of housing or the duration of available mortgage instruments, both of which appear to have a nontrivial impact on overall homeownership rates.  It is interesting that the predicted 1960 ownership rate rises when the mortgage interest deduction is eliminated, implying an important divergence between partial and general equilibrium results.

As in most conference volumes, the chapters of this book do not seamlessly cover a particular area of research, nor were they supposed to.  Instead, as individual pieces of work, they impress with the quality of their insight and their resourcefulness in bringing data to bear on important questions.  They also find plenty of common ground for motivation and discussion as a collection of research papers.  Any scholar interested in the history of U.S. housing and mortgage markets or seeking to learn more about historical antecedents to the most recent financial crisis would find the book worth reading.

William J. Collins is the Terence E. Adderley Jr. Professor of Economics at Vanderbilt University.  He has authored several papers on the economic history of home ownership with Robert A. Margo (Boston University).  He is a Research Associate of the NBER but was not involved in the planning or production of this volume or the preceding conference.

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