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Mortgage Lending and American Urbanization, 1880–1890

Published online by Cambridge University Press:  03 March 2009

Kenneth A. Snowden
Kenneth A. Snowden
Affiliation:
Assistant Professor of Economics, University of North Carolina at Greensboro, Greensboro, NC 27412.
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Abstract

The connection between the spatial pattern of the urban growth spurt of the 1880s and the mortgage market is an aspect of the familiar capital market segmentation hypothesis that has received little attention. Although mortgage lending expanded most rapidly in the smaller western cities during the decade, I conclude that an underlying pattern of segmentation impeded urbanization in these areas at least until 1890. The initial advantage that segmentation conferred on borrowers in the East was reduced to some extent by binding usury ceilings along the Atlantic seaboard.

Type
Papers Presented at the Forty-Seventh Annual Meeting of the Economic History Association
Information
The Journal of Economic History , Volume 48 , Issue 2 , June 1988 , pp. 273 - 285
Copyright
Copyright © The Economic History Association 1988

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References

1 See Stock, James A., “Real Estate Mortgages, Foreclosures, and Midwestern Agrarian Unrest, 1865–1920,” this JOURNAL, 44 (03 1984), pp. 89–106;Google Scholar and Eichengreen, Barry, “Mortgage Rates in the Populist Era,” American Economic Review, 74 (12 1984), pp. 995–1015.Google Scholar

2 Snowden, Kenneth A., “Mortgage Rates and American Capital Market Development in the Late Nineteenth Century,” this JOURNAL, 47 (09 1987), pp. 671–92.Google Scholar

3 Pred, Allan R., The Spatial Dynamics of U.S. Urban-Industrial Growth, 1800–1914 (Cambridge, Mass., 1966), pp. 78–81.Google Scholar

4 Williamson, Jeffrey G. and Swanson, Joseph A., “The Growth of Cities in the American Northeast, 1820–1870,” Explorations in Entrepreneurial History, 2nd series, supplement 4 (1966), pp. 4–6.Google Scholar

5 Almost all cities with population greater than 8,000 in 1890 are included in the sample. The data are drawn from U.S. Census Office, vol. 12: The Report on Real Estate Mortgages in the United States (Washington, D.C., 1895);Google Scholar and U.S. Census Office, vol. 13: The Report on Farm and Home Proprietorship and Indebtedness (Washington, D.C., 1895). For a more complete discussion of these sources see, Snowden, “Mortgage Rates,” pp. 673–75.Google Scholar

6 Grebler, Leo et al. , Capital Formation in Residential Real Estate (Princeton, 1956), pp. 14–17.Google Scholar

7 During the 1880s the total mortgage debt of the country increased three times faster than the nation's wealth and six times faster than population. Over 60 percent of this new debt was on urban properties. U.S. Census Office, “The Report on Real Estate Mortgages,” pp. 309–12.Google Scholar

8 Davis, Lance, “The Investment Market, 1870–1914: The Evolution of a National Market,” this JOURNAL, 25 (09 1965), pp. 355–93.Google Scholar

9 Bogue, Allan, Money at Interest (Ithaca, 1955).Google Scholar

10 The failure of financial intermediation to fully integrate the national mortgage market is noted in Frederiksen, D. M., “Mortgage Banking,” Journal of Political Economy, 2 (03 1894), pp. 210–21;CrossRefGoogle Scholar and Davis, “The Investment Market,” pp. 384–85.Google Scholar

11 The population and urban mortgage shares and growth rates discussed in this section of the paper are not strictly comparable. The population shares are percentages of the total population of the 441 cities in the sample. The lending shares are the percentages of mortgage debt outstanding on lots in the 336 counties which contained the sample cities. The mortgage information was taken from U.S. Census Office, “The Report on Real Estate Mortgages,” table 107, pp. 730–49.Google Scholar

12 Throughout the paper cities are classified according to the largest city within 25 miles. This classification is intended to capture the institutional framework in which lending was conducted.Google Scholar

13 The population growth rates are decadal percentage increases for all cities in each group, while the lending growth rates are averages of the annual percentage increase in the total volume of mortgages made in the counties which contained the sample cities in each group. For the counties in Pennsylvania the total mortgage debt for each county could not be classified as having been on lots or on acres. I applied the statewide share of lending on lots for each year to the total annual lending flows for each of these counties.Google Scholar

14 Mortgage contracts averaged around 6 years in the Northeast, but only 2 or 3 years in the West and South. For home mortgages the encumbrance-to-value ratio was at least 5 percent higher in the Northeast than in any other region, and more than 10 percent higher than in the West. Similar differences existed between the small and large cities.Google Scholar

15 All interest rates used in the analysis are average effective rates for all of the home mortgages sampled by the Census Office. The effective rate includes initial commisions as well as contractual interest payments.Google Scholar

16 For a more detailed discussion of the use of this type of specification see Snowden, “Mortgage Rates,” pp. 676–79.Google Scholar

17 Population growth is clearly an imperfect proxy for the percentage of funds that had been lent from out of state. This is because each market's excess demand for funds would be a function of the supply, as well as the demand, of loanable funds. Population growth may also serve as a risk proxy. To examine the behavior of the population growth variable in the abbreviated specification used here, I conducted further analysis of the sample used in my earlier paper for which the out-of-state lending variable was available. Fortunately, for that sample population growth does pick up much of the influence of the out-of-state lending variable in the latter's absence. Moreover, the coefficient on population growth for that sample was quite close to its coefficient in the regressions reported below. The results of the regression using the abbreviated specification on my earlier data set are available upon request.Google Scholar

18 For an analysis of usury ceilings in the modern mortgage market see Ostas, James R., “Effects of Usury Ceilings in the Mortgage Market,” Journal of Finance, 31 (06 1976), pp. 821–34.CrossRefGoogle Scholar

19 Eichengreen, “Mortgage Rates,” pp. 1009–13.Google Scholar

20 In the East North Central region, where all 105 cities were subject to usury ceilings, average rates were within 0.2 percentage points of the ceilings in only 3 cities, and more than a full percentage point below the maximum rate in more than 70 cities. In the West North Central region only 3 out of 43 cities were within 1 percentage point of the stated usury ceiling.Google Scholar

21 Usury ceilings appear to have been potentially important for the cities in Alabama, Kentucky, and Tennessee. The first two of these, however, had the highest incidence of usurious lending (by volume) in the country. See U.S. Census Office, “Report of Real Estate Mortgages,” p. 174.Google Scholar

22 Georgia had one of the highest incidences of usurious mortgages in the country, but rates in 3 of the 4 cities in the state average rates were within 0.15 percentage points of the ceiling. Average rates in 5 of the 9 cities in Virginia were right at the usury limit, but in the other 4 were well above the limit.Google Scholar

23 I thank Carol Heim for pointing out that market segmentation may have stimulated eastern demand for western agricultural products by providing a stimulus to eastern city growth. Such a feedback could have offset to some extent the influence of higher mortgage rates on western urbanization that I emphasize here.Google Scholar

24 Because downpayments in 1890 were invariably larger than 50 percent of the value of the property, the opportunity costs of these funds were a much larger component of total financing costs than in the modern era. The total financing costs reported here were calculated as the sum of annual interest charges and foregone interest income (associated with the downpayment) per dollar of property value. I assumed that the opportunity costs of funds for borrowers was 4 percent per annum, the yield on savings deposits in 1890.Google Scholar

25 In calculating the regional and city size effects I assumed that the regional effect in the East North Central region (the omitted dummy in the western city regression) was 0.5 percentage points, its value in the all-city regression. In my earlier paper I found that the regional effect for the East North Central market was 0.9 percentage points. The costs of segmentation reported here do not include the transactions costs premia captured by the population growth variable because of the ambiguity in its interpretation noted above. If the transactions costs on imported funds found in my earlier paper are included, the increase in financing costs due to segmentation would range from 18 percent in the West North Central region to 23 percent in the West.Google Scholar

26 Muth, Richard, “The Demand for Non-Farm Housing,” in Harberger, A. C., ed., The Demand for Durable Goods (Chicago, 1960). Muth used a bond yield instead of the mortgage rate in his empirical work and attributed the small measured elasticity value to this specification. It should be noted that while mortgage contracts were of short maturity during the late nineteenth century, they were usually renewed several times. The average maturity of mortgages in the period examined by Muth was not reported. If the effective mortgage maturity were shorter in 1890, then the interest elasticity would be smaller in absolute value.Google Scholar