It’s Housing, Stupid! Parallels Between the 1920s and the 2000s



In response to my recent essay “Obama and Hoover: Two ‘Smart’ (Stupid) Presidents”, one commenter did me the service of rehashing the old myths about the 1920s and the causes of the depression and how Herbert Hoover did little, FDR did a lot and Hoover has nothing in common with “Wonder Boy” Obama. (Coolidge dismissed Herbert Hoover as “Wonder Boy” and stated that all his “unsolicited” advice was “bad”). Those are all myths (except Coolidge did oppose Hoover’s Progressive agenda).

The commenter also noted that I was working on the “housing bubble” (true) and claimed that the topic has been done already by studying the Florida real estate boom. The following response is worth repeating because the 1920s housing and construction bubble had a lot in common with the 2000s bubble. Florida, I argue, was a blip and insignificant compared to the nationwide overbuilding of housing.

Here is my revised response:

First, I never mentioned Florida at all—and that is on purpose. People mistake the far larger housing (and construction) bubble of 1921 onward for the Florida episode. In fact, the business press was constantly talking about how more mundane building (especially single-family homes) was booming with low rates and new “mortgage real estate bonds” packaged for sale as securities. When the bust came, they discovered that the appraisals inflated the value of the underlying mortgage. Government also played a role in the bust because foreclosure laws made it very difficult to remove people from homes (it could take up to 2 years). Sound familiar?

As for Hoover’s macroeconomic impact in the 1920s: Granted, his many recommendations for a massive countercyclical approach in the 1920-1921 depression were ignored by Harding but Hoover pledged to act on them if he ever became President. Go to americanpresidency.org and read his speeches 1930 onward: he boasts that his administration, together with the Federal Reserve, would be the FIRST EVER to use an aggressive counter-cyclical approach to depression. And so it was.

From Peter Fearon’s War, Prosperity and Depression synthesis of the literature on those years:

“E. Cary Brown’s study of fiscal policy during the thirties found that if the spending of all branches of government was aggregated, the stimulating effect of fiscal policy was larger in 1931 than in any other year during the decade. If the federal budget alone is considered, the two-year period 1929-1931 was one of greater fiscal stimulus than any similar term during the entire 1930s.”!!! (Fearon, 125). You can find Brown’s study in American Economic Review (1956).

Or to put it in perspective: while GDP shrank from 103.6 billion in 1929 to $58.7 billion, total government spending increased from 11.68 billion to $12.44 billion. That is a nominal increase in the face of massive deflation. Translation: a substantial real increase in spending (after deflation). Thus, it’s no accident that Herbert Stein’s Presidential Economics starts the first substantive chapter with the title “Hoover and Roosevelt: The Depression Origins of Liberal Economics.”

On the importance of housing to the general business cycle, including the Great Depression, see recent works by Edward Leamer, “Housing IS the Business Cycle” (NBER paper; see also “Housing and Cars: Why are the Cycles to Similar?”). Economists are turning to what the business press saw and wrote about in the 1920s and early 1930s: “It’s housing, stupid!” That is a new interpretation and it is not in the historical literature. Historians have focused singlemindedly on the stock market. What they fail to understand is how deeply many financial institutions were invested in real estate and construction—and that started to crest in 1925 and then plummet in 1928. MANY observers saw it as the precipitating cause of the stock market crash. In 1931, one business reporter noted that in the Greater NYC area, savings banks were invested 60-70% in construction, life insurance company assets were 40% construction, building and loans (of course) were entirely invested in housing. This was more or less true across the nation. When prices plummeted in 1928, the valuation of total construction dropped by 75% (1925-1932).

Your other claims about Hoover doing little are easily refuted by the numbers (total government spending is what matters) and initial jawboning to maintain wages (classical economic critics slammed him for not letting wages and prices drop). You are correct on one thing: the drop in private construction offset this crude Keynesian approach. But that just goes to show that the “stimulus” approach of Hoover, et al. doesn’t work. Yet here we are doing the same thing all over. We learn nothing.

Postscript: forget the Florida boom, it was a blip. What happened in the 1920s was very similar to what happened in the 2000s. Find me a textbook that draws that parallel or does anything but talk about the stock market, a free market run amok, etc. In short, there is a lot of exciting new literature by economists on the importance of residential housing cycle but historians are stuck in the old textbook script that you recount toward the end of your post.

Recommended reading: in addition to works by Leamer, see the following works. Note that nearly all of this work is by economists and relatively new (although some saw it in the 1930s and the business press chronicled the bubble/bust in the 1920s). Foldvary gets an “award” for predicting the crash with his “Austrian-Georgist” analysis but Gjerstad and Smith raised attention after the fact with their papers and articles in the Wall Street Journal (Smith was 2002 Nobel winner in economics). The award for worst timed prediction goes to Smith and Smith, “Bubble, Bubble, Where’s the Housing Bubble?” (2005) which saw housing as still a good investment. For a cheeky look at that wrongheaded analysis, see this “flashback” blog.

Blaszczyk, Regina Lee. “No Place Like Home: Herbert Hoover and the American Standard of Living,” in Uncommon Americans: The Lives and Legacies of Herbert and Lou Henry Hoover (2003)

Davis, Morris and Jonathan Heathcote. “Housing and the Business Cycle.”

Foldvary, Fred. “Economic Forecast, 2004-2010“: “My forecast is a severe depression at the end of the decade” based on his reading of the housing boom.

——. “The Business Cycle: A Georgist-Austrian Synthesis.” American Journal of Economics and Sociology 56 (4) (October 1997): 521-41.

——. The Depression of 2008. Gutenberg Press, 2007. 36 pages.

Gaffney, Mason, “An Award for Calling the Crash,” Econ Journal Watch (May 2011)

Gjerstad, Steve and Vernon L. Smith, “Household Expenditure Cycles and Economic Cycles, 1920-2010,”

_____. “From Bubble to Depression,Wall Street Journal (April 6 1929)

_____. “Why We’re in for a Long, Hard Economic Slog,” Wall Street Journal (September 10, 2010)

Philips, McManus, Nelson. Banking and the Business Cycle: A Study of the Great Depression in the United States (1937; reprinted 2011)

Simpson, Herbert. “Real Estate Speculation and the Depression,” American Economic Review (1933): notes the urban/suburban nature of the latest bubble of the 1920s.

White, Eugene. “Lessons from the Great American Real Estate Boom and Bust of the 1920s” (NBER, September 2009)

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