The Great Depression is associated with the stock market mania that came to an end in the United States in 1929 but the ‘20s saw more than a bubble in stock prices, there was an excited frenzy in real estate too. The decade was known for an expansion of consumer credit that enabled the middle classes to buy cars and early electric appliances. It should not be surprising to find out that this expansion of credit extended to mortgages and therefore to real estate construction and home buying too. The real estate bubble of the 1920s was beginning to taper out long before the stock market crashed, certainly by the end of 1926 if not as early as 1925. However, the real estate bubble is certainly linked to the eventual Depression.
Building
In 1920, conditions in America were ripe for a construction boom. Slightly less than half of American households owned their own home in 1920, a rate much lower than that of today. There was also a lack of housing construction during the preceding years, during the First World War. The country was particularly poised for a boom in suburban real estate as cars put more land within close reach of suburban rail stations or the cities themselves. However, a construction frenzy got underway in many parts of the country.
From a wartime slump, housing starts rose to 500,000 per year in the early 1920s and thus just above the pre-war average. But housing starts kept rising from there, reaching levels double the pre-war rate by 1925. During the mid-1920s, annual residential construction expenditures in the US were well over double the pre-war pace
Mortgage Credit
It is not surprising that a rise in construction activity coincided with a growth in mortgage credit. Nonfarm residential mortgage debt tripled to reach $30 billion by 1929. There were several factors supporting the availability of credit. For one, interest rates were low and stable and seasonal fluctuations in interest rates which were the norm historically were smoothed out in this period. Also, unemployment was low and after the early 1920s especially, the economy saw good economic growth.
New lending institutions were gradually replacing old ones in the 1920s. The proportion of mortgage funding from friends, family, and private individuals fell from 42.2% of mortgage finance in 1920 to 37.1% in 1926; financing provided by individuals rather than entities was particularly important in the Western states. Mutual savings banks, most important in the Northeast, also saw their share fall. Gaining importance were commercial banks, insurance companies, and building and loan associations. In New York, mortgage guarantee companies were meaningful participants, first insuring and then originating mortgages; the number of these companies active in New York alone grew from twelve to fifty over the 1920s.
Building and loan associations were particularly active. They offered mortgage financing to an association membership which numbered twelve million by the end of the decade as compared to four million at the start. Real estate developers were establishing their own building and loan associations to provide financing to buyers of their new construction. Also becoming more significant were bonds backed by mortgages. These securities were often secured by mortgages on commercial properties but some of these bonds were secured by single family and smaller multifamily homes. Across all funding sources taken together, the annual rate of increase in mortgage debt well over doubled between 1922 and the middle of the decade.
Construction financing also became more readily available as mortgages funded a larger share of residential real estate construction. Such funding accounted for less than 45% of construction budgets before the war but 60% at the height of the 1920s construction boom. The rest continued to be funded with equity capital or by installment or other sales contracts for the property that essentially constituted extra financing for the builder.
Prior to the New Deal of the ‘30s, the typical mortgage loan looked very different in America. Mortgages then had large final payments due at the end of loan terms as short as five years; they typically incorporated little or no amortization. Among a sample of commercial banks, the portion of loans without any amortization over their term increased from 41% to 50% over the 1920s. These loans typically had low loan-to-value ratios, averaging just above 50%. Building and loan associations generally provided amortizing loans at higher loan-to-value ratios, which required smaller down-payments. Their lending also included second lien loans.
One form of non-mortgage financing remained important in this period of growing credit availability. These were land contracts which were an arrangement similar to ‘rent-to-own’ where the creditor was the landlord to the borrower. Land contracts were common in Western states and, compared to mortgage financing, allowed for smaller down payments.
Prices and Construction
It isn’t impossible that credit expands and construction activity picks up without major appreciation in real estate values but that was not the case in the 1920s. Instead, house prices rose at a brisk pace, peaking in 1925-26. Even Washington D.C., a city that was not a hotspot during the mania, saw the median asking price for a single-family home rise 38% between 1920 and the peak. Manhattan real estate appreciated 54% from the last quarter of 1922 to a peak in that city in the second quarter of 1926. Yet, the appreciation in these places was nothing compared to that taking place elsewhere, most notably in Florida. Across the United States, the value of newly constructed homes rose 43% between 1921 and 1926.
Construction of single-family homes peaked in 1925 before a noticeable drop from 1926 on; meanwhile, multi-family construction remained high until 1928. The market for real estate bonds, which largely funded larger commercial properties, kept growing until around 1928 too.
While different segments and geographies peaked at different points in the 1920s, activity in the real estate market generally turned a corner well before the Great Depression set in. Prices had already been sliding, at least in some markets, since 1925 and foreclosures were becoming more common starting from 1926. Yet, banks were not driven to collapse by their real estate lending, even as conditions cooled noticeably. In fact, the pace of bank failures was declining between 1926 and 1928. It took the Depression for prices to fall materially, foreclosures to reach their heights of the cycle, and for bank failures to spike.
Crash
In 1930, mortgage debt in the United States still increased by about $1 billion, but this was less than a third of the annual rate of growth of the middle of the decade, over $3 billion a year. Credit provided by individual lenders and building and loan associations, which together held about 60% of mortgage debt drove 95% of the slowdown in financing activity. The number of building and loan associations fell from 12,804 in 1927 to 10,596 in 1933. Banks were also retreating as bank failures spiked from 2.5% per year to 20% in 1931-32.
During the Great Depression, the decline in house prices accelerated. Homes depreciated by about one-third between 1930 and 1934. Mortgage loans turned bad left and right. By 1934, about 42% of mortgages on owner-occupied properties and 46% of those on rental properties were in arrears. Second- or third-lien mortgages were often underwater. The Home Owners’ Loan Corporation, formed in 1933 to refinance mortgage loans for distressed borrowers, had a lot of work ahead of it.
The Home Owners’ Loan Corporation could not save everyone. Foreclosures peaked in the early- to mid-1930s at a rate of about 12-13 per thousand mortgaged properties per year. Cumulatively between 1927 and 1937, nearly 11% of mortgages on owner occupied properties were foreclosed on and the rate slightly higher still on rental properties. Foreclosures themselves understate the distress; many borrowers simply abandoned their properties or lenders utilized an alternative remedy, a power of sale allowing them to force a property on the market without taking control of it.
It’s plausible that the gap between the peak of the housing market, for single family homes at least, and the crash of 1930 onwards is large enough that the real estate crash had little to do with the run up in prices that ended about 4-5 years earlier. However, research by Michael Brocker and Christopher Hanes shows that local markets which peaked in the mid-1920s, in terms of building permits for new single-family homes, saw larger drops in house prices and higher foreclosure rates in the Depression. The correlation was weaker for multifamily construction and in local markets that peaked at some time other than the mid-1920s.
Besides the timing of the peak across cities, there was also a correlation between the volume of single-family permits given between 1923-25 and the drop in home values in the period 1930-34. Further, home ownership rates fell most in cities with the more pronounced mid-1920s boom. So, the real estate frenzy in the first half of the 1920s and the bust in the first half of the 1930s are certainly linked.
Lesson
The real estate bubble of the 1920s is often compared and contrasted with that eighty years later. Both saw expansions of credit and both surging construction activity and brisk appreciation of real estate. However, there are important differences, including ones that go beyond the structure of mortgage loans or the form of institutions dominating the mortgage market.
While a notable financial feature in 1920s America, the real estate bubble was not the cause of the Great Depression in the manner that subprime real estate lending caused the 2008 crisis. During the 1920s, a substantial part of the construction activity merely offset an indisputable housing shortage caused by the war. Further, the most extraordinary real estate frenzies happened in markets like Florida which, in the 1920s, were home to a very small part of the country’s population and wealth. In some ways, the 1920s saw a real estate bubble superseded by a far more substantial bubble in stock prices which made the developments in the real estate market look innocent by comparison.
More from the Tontine Coffee-House
Read about the evolution of American mortgages, the bank failures of the early 1930s, and Businessweek magazine’s coverage of the Great Depression. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.
Further Reading
1. Brocker, Michael, and Christopher Hanes. “The 1920s American Real Estate Boom and the Downturn of the Great Depression: Evidence From City Cross‐Sections.” Housing and Mortgage Markets in Historical Perspective, edited by Eugene N. White et al., University of Chicago Press, 2014, pp. 161–201.
2. Harris, Richard. “Completing the Picture of the Depression Housing Crisis.” Enterprise & Society, vol. 25, no. 3, Sept. 2023, pp. 789–812.
3. Snowden, Kenneth A. “The Anatomy of a Residential Mortgage Crisis: A Look Back to the 1930s.” The Panic of 2008, edited by Lawrence E. Mitchell and Arthur E. Wilmarth, Jr., Edward Elgar, 2010, pp. 51–74.
4. White, Eugene N. “Lessons from the Great American Real Estate Boom and Bust of the 1920s.” Housing and Mortgage Markets in Historical Perspective, edited by Eugene N. White et al., University of Chicago Press, 2014, pp. 115–58.
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