The housing slump and the great depression in the USA

Abstract

The collapse of residential construction was a notable feature of the Great Depression in the USA. The housing slump did not simply follow the downward shifts in income: rather residential investment collapse helped to precipitate the Great Depression. By utilizing an augmented Tobin’s q model of residential investment, we show that heightened uncertainty surrounding builders’ anticipated profits largely explains the housing slump in the key year of 1930. A combination of forces, including house prices, building costs, credit and demand constraints, and financing costs, is shown to explain the longer decline of residential investment in 1928–1933. Tighter monetary policy played an important role in 1928–1929, whereas financial disintermediation was influential in 1933–1934.

Data appendix

Land prices Before 1986: Peter H. Lindert, 1988, “Long-run Trends in American Farmland Values,” Agricultural History, 1988, 62(3), 45–85. Land prices were first available on an annual basis after 1910. Before then land prices are interpolated exponentially between the years 1890, 1900, 1905 and 1910. After 1986: US Department of Agriculture. Building costs Robert J. Shiller, Irrational Exuberance, 2nd Edition, Princeton University Press, 2005, Broadway Books 2006, as updated by author (http://www.irrationalexuberance.com/). House prices Shiller 2005, op cit. Short interest rates F. R. Macaulay, 1938, “The Movements in Interest Rates, Bond Yields, and Stock Prices,” New York: National Bureau of Economic Research, various publications of the Federal Reserve Board, and IMF, International Financial Statistics. Real per capita income Real GDP divided by population. Economy-wide real GDP OECD, National Accounts, after 1950. Before 1950: A. Maddison, 1995, Monitoring the World Economy 1820–1992, OECD: Paris. Population A. Maddison, 1982, Phases of Capitalist Development, Oxford: Oxford University Press. Updated using IMF, International Financial Statistics. Nominal income 1870–1929: N. S. Balke and R. J. Gordon, 1986, The American Business Cycle: Continuity and Change, Chicago: University of Chicago Press. 1929–1960 Survey of Current Business August 1998: “GDP and Other Major NIPA Series 1927–1997”, and OECD, National Accounts, Paris. Uncertainty See Greasley and Madsen (2006). Credit variables The interest rate on risky corporate bonds: Balke and Gordon, 1986, op cit. The spread between a high-grade long-run corporate bond minus the interest rate on high-grade municipal bonds: Department of Commerce, 1975, Historical Statistics of the United States: Colonial Times to 1970, Bureau of the Census: Washington DC. (Tables Cj1195 and CJ1196). Bank suspensions: Historical Statistics, 1975, op cit. Credit Carter. S., S. S. Gartner, M. R. Haines, A. L. Olmstead, R. Sutch, and G. Wright (eds), 2006, Historical Statistics of the United States, Millennial Edition, Cambridge: Cambridge University Press, League of Nations, Commercial Banking, Geneva, United Nations, Statistical Yearbook, Domestic Credit of Banks, and IMF, International Financial Statistics (banking sector claims on private sector, 32d). Private residential investment Carter et al. (2006) op cit. Table Dc92–105. Updated using OECD, National Accounts, Vol. 2. Residential capital stock Inventory perpetual method and a 2% depreciation rate. The initial capital stock is estimated as the average investment over the first 5 years and the data are available (1889–1893) and divided by the rate of depreciation plus the average growth rate in investment over the period 1989–2009.