The 1920s American Real Estate Boom and the Downturn of the Great Depression: Evidence from City Cross-Sections

Looking back on the real estate boom of the 1920s, economists have grappled with two questions: did it contribute to the depth of the Great Depression, and was it the result of an irrational "bubble" in residential real estate? This chapter examines cross-sectional data on residential construction, house prices and other variables across American cities in the 1920s and the downturn of the Great Depression, finding that cities which had experienced the biggest house construction booms in the mid-1920s, and the highest increases in house values and homeownership rates across the 1920s, saw the greatest declines in house values and homeownership rates after 1930. They also experienced the highest rates of mortgage foreclosure in the early 1930s. These patterns look very much like those around 2006. They are consistent with a bubble. They show that the effects of the mid-1920s boom on house markets were still present as of 1929. They suggest that, in the post-1929 downturn of the Great Depression, house prices fell more and there were more foreclosures because the 1920s boom had taken place.