- Tom BrezsnyThe Fed’s Grand Experiment
Picking up the thread… talking about homeownership and its evolution since WW2 when the Fed began its 75 yr experiment to grow the ranks of homeownership and make it an indelible part of the American Dream.
Prior to 1945, homeownership had a different role in the culture than it does today. It wasn’t the same central life goal for the average person or coveted benchmark for their socio-economic success. The American Dream had more to do with achieving prosperity through hard work rather than acquiring a mythical “dream home” with a white picket fence in a tree-lined neighborhood. That part came later…
From the 1890s to 1930 homeownership levels languished below 50% and remained almost unchanged for 40 years, despite sweeping changes transforming the Country: massive industrial growth, widespread adoption of the automobile, steady migration from rural towns to cities and rapid economic expansion during the roaring 20s. None of those things had a measurable effect on the collective rate of homeownership.
Not surprisingly homeownership declined during the 1930s, due to the steep rise in unemployment, loss of savings and wholesale disruption of banking systems during the Great Depression. At one point, 40-50% of the existing mortgages were in default and 10% of U.S. homes were in foreclosure.
The New Deal created a number of entities to stabilize the housing market and make homeownership more affordable: the Home Owners’ Loan Corporation, the Federal Housing Administration and the Federal National Mortgage Association (Fannie Mae). While their short term impact was modest, they laid important groundwork for homeownership growth in the decades to come.
By 1940, homeownership had shrunk to 43% with most of the Country’s resources and manufacturing might increasingly being diverted to the war effort. New home construction all but stopped as the Country hunkered down and larger concerns about homeownership were put on hold.
Many of the recognizable features of today’s housing market were missing back then. The 30 yr fixed rate mortgage (later known as “the American mortgage” ) didn’t make an appearance until the late 1940s. Shorter loan periods required larger down payments and quicker pay-offs and since most mortgages weren’t government backed, interest rates were high. A typical home purchase required 50% down and interest-only payments for five years until a balloon payment was due – not a good recipe to expand housing opportunities.
Sprawling tracts of detached, single family houses also weren’t the norm.. By the 1930s the majority of the population lived in urban settings where dense multi-level apartments and attached row-style homes were most common. There were 37 million total housing units in 1940 and a third of them had no flush toilets.
Next Week: The Post-War Housing Boom Arrives
