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