Lessons from the Great American Real Estate Boom and Bust of the 1920s

Although long obscured by the Great Depression, the nationwide housing "bubble" that appeared in the early 1920s and burst in 1926 was similar in magnitude to the recent real estate boom and bust. Fundamentals, including a post-World War I construction catch-up, low interest rates and a "Greenspan put," helped to ignite the boom in the twenties, but alternative monetary policies would have only dampened not eliminated it. Both booms were accompanied by securitization, a reduction in lending standards, and weaker supervision. Yet, in contrast to the recent crisis, the bust in the twenties, which drove up foreclosures, did not induce a collapse of the banking system because incentives to financial institutions induced them to limit leverage and the accumulation of mortgage debt on their balance sheets.