housing and the new deal -- 11/27/23

Today's selection -- from The Great American Housing Bubble by Adam J. Levitin and Susan M. Wachter. Homeownership was substantially lower before the New Deal, and it was ownership of smaller houses at higher prices:

“The modern American housing finance system is built on a New Deal foundation. The products and institutions that shape today's market originated in the New Deal's response to the collapse of the housing finance system during the Depression. To understand these products and institutions and the problems they were designed to address, we need to go back and examine the state of the housing finance market before the New Deal.

“There is limited material on housing finance before the Great Depression. No comprehensive history exists. Primary sources, to the extent they exist, provide only an atomistic view of the market, and the available data are often spotty and of questionable reliability. With these caveats, however, a clear picture of the pre-New Deal mortgage market nevertheless emerges.

“Before the New Deal, America had low homeownership rates and smaller, but more expensive, housing with far fewer amenities. Pre-New Deal housing markets were local, not national. Housing finance was scarce, and rates varied substantially among regions. Short-term, nonamortizing loans with high down payments were the standard loan product. Noninstitutional lenders were a substantial portion of the market—that is, many loans were made by individuals. There were virtually no secondary markets, and there was no federal governmental involvement in the housing finance market outside of a brief intercession during World War I.

“The most salient feature of the pre-New Deal housing finance market is a substantially lower homeownership rate than today. Renting, rather than owning, was the pre-New Deal norm. The first US Census Bureau study of homeownership, from 1890, put homeownership rates at 48 percent. Homeownership rates hovered in that range until 1930, when they declined during the Depression. There were large variations in homeownership rate by state, ranging from 29 percent in South Carolina to 78 percent in North Dakota. Homeownership also varied considerably by race. While white homeownership rates were 51 percent in 1890, just 17 percent of black households were homeowners. 

“Among homeowners in 1890, most (72 percent) owned their homes free and clear, meaning that only 13 percent of the total population had a mortgage. White homeowners were much more likely to have mortgages than black homeowners, with 29 percent of white homeowners having a mortgage, compared with just 11 percent of black homeowners, a situation reflecting racial disparities in access to credit. Likewise, there were substantial regional disparities in mortgage finance. Nearly half the homes and farms in the Central Plains were mortgaged, and the northeastern states also had a high rate of mortgage finance, but less than 10 percent of homes and farms in the South were mortgaged. Despite these variations, a mortgage was the exception rather than the rule in pre-New Deal homeownership, so consumers' ability to purchase housing was generally constrained to current income and savings. 

Federal Housing Administrator Stewart McDonald (right) discusses with Senator Robert F. Wagner, author of the Wagner Housing Act

“Prior to World War I, the United States was predominantly a rural nation, with much of the population engaged in agriculture. As a result, farms were an important part of the US housing stock, but they differed substantially from other housing by virtue of being income-generating properties. The large percentage of the population living on farms also meant that farm finance was, in part, housing finance, and farm policy was housing policy. Homeownership was much higher on farms (66 percent) than for houses generally (36 percent), and especially as compared to urban areas (22 percent in large cities). Again, there were huge regional disparities, with farm tenancy being much higher in the South than elsewhere.  

“Simply comparing homeownership rates does not tell the full story of the pre-New Deal housing market. Home type, amenities, and size were also considerably different from today. Single-family detached housing has remained at around 60 percent of the housing stock since 1900, but there has been a shift in the nature of multifamily housing. Multifamily buildings were, historically, primarily two- to four-family units; they have been increasingly replaced by large, multiunit buildings. 

“Likewise, home amenities were substantially different in pre-New Deal America. In 1920, only 1 percent of US homes had both electricity and indoor plumbing. Even in 1940, 45 percent of homes lacked complete indoor plumbing (hot and cold piped water, a bathtub or shower, and a flush toilet).

“Historically, houses were also considerably more crowded. The average home size was smaller, and it contained more people than today. At the beginning of the twentieth century, the average new home had 700-1,200 square feet of living space. In contrast, the average new home completed in 2018 had 2,588 square feet of living space. In 1890, there were, on average, five people per housing unit, a number that has dropped to approximately two today. Thus, real population density in homes has declined something around tenfold over the past century, substantially changing the nature of people's interactions and expectations of privacy. 

“While pre-New Deal housing was more modest than today's, housing costs, relative to income, were higher. In 1900, the average home price was around $5,275. This was at a time when median household income was around $750, making the median home price about seven times the median income. In 2018, median household income was $63,179, while the median existing home sold in July 2018 for around $269,600, or over four times the median income.

“Thus, not only was homeownership substantially lower before the New Deal, but it was ownership of less house and cost much more.”

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Adam J. Levitin , Susan M. Wachter


The Great American Housing Bubble: What Went Wrong and How We Can Protect Ourselves in the Future


Harvard University Press


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