Chicago per capital land values , compared with wholesale prices , wages of unskilled labor and retail stock prices in the United States , 1831 – 1933 , from Homer Hoyt ’ s One hundred Years of Land Values in Chicago .
market peaked in Los Angeles in 1923 . By 1924 , developers had abandoned 156,557 lots in Los Angeles with an estimated assessed valuation of $ 1.1 billion and annual carrying costs of $ 100 million .
In Chicago , residential real estate topped out in 1926 , but , given “ estimates of future population increase , it [ would ] take until 1960 to absorb the vacant lots already subdivided in 1928 .” In Detroit , there was one lot in use for every three lots left vacant . In city after city , “ taxes had risen to meet the costs of governing the vast stretches .” Tax delinquencies followed .
In 1933 , Professor Ernest M . Fisher wrote that the “ savings of thousands who had speculated have thus been wiped out . Capital expended in the installation of streets , sidewalks and public utilities lies idle and is rapidly disappearing .”
At the 1933 meeting of the American Economic Association , Professor Herbert D . Simpson laid out the dynamic :
During this period of prosperity , real estate taxes were paid with little complaint … Under these conditions , public expenditures expanded and taxes were increased without protest … The result has been a structure of public expenditure which has been difficult to curtail , and a volume of indebtedness whose solvency is now jeopardized on a large scale .
Simpson continued :
All the existing resources of existing banking and financial institutions were utilized to the full in financing this speculative movement . The insurance companies bought what were considered the choicer mortgages ; conservative banks lent freely on real estate mortgages , and less conservative banks and financial houses loaned on almost everything else that represented real estate in any form … Real estate interests dominated the policies of many banks , and thousands of new banks were organized and chartered for the specific purposes of providing credit facilities for proposed real estate promotions … In the extent to which their deposits and resources were devoted to the exploitation and promotions carried on by controlling or associated interests , these banks commonly stopped short of nothing but the criminal law — and sometimes not short of that .
Nobel Prize-winning economist Robert Shiller calculated that single family home prices dropped 4.1 % between 1925 and 1926 ; 8.2 % by 1929 ; and 12.2 % between 1925 and 1930 . In 1929 , a “ period of widespread default ” started to accelerate . Over 10 % of Chicago real estate bonds were already in default . Assets on the balance sheets of financial institutions were suffering a similar deflation .
Yet the building continued . More generous financing was provided in which the speculator had less to lose . J . E . Morton ’ s description of that period offers similarities to our post-millennial decline in lending standards :
It is known , at any rate , that there was some tendency in the second half of the ’ 20s for loan-to-value ratios to rise , and for maturities to lengthen , other things may have happened to
26 FINANCIAL HISTORY | Spring 2016 | www . MoAF . org