The New Deal, the GI Bill, and the Post-War Housing

Don Schlagenhauf, Carlos Garriga () and Matthew Chambers ()

No 1050, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: After the collapse of housing markets during the Great Depression, the government played a large role shaping the future of the housing .nance, housing policy in the New Deal, as well as the development of the GI Bill for war veterans that had signi.cant importance for mortgage .nance and education. Soon after, the housing markets witness the largest boom in recent history. The objective in the paper is to quantify the contribution of government intervention in housing markets in the expansion in U.S. home ownership using an equilibrium model of tenure choice. In the model home buyers have access to a menu of mortgage choices to .nance the acquisition of the house. The government also provides special programs, consistent with the provisions of the GI Bill and the tax code. The parameterized model is consistent with key aggregate and distributional features in the U.S. in 1940. The model is capable of accounting for 95 percent of the boom in homeownership. The model suggests that government policies had a non-trivial effect in the housing boom. All these policies has positive effects in the demand for housing by reducing the relative cost. For example, introduction of the mortgage deduction can account for 13 percent of the increase in ownership. The asymmetric treatment of owner-occupied housing also had signi.cant effects in housing demand. The model suggests that 35 percent of ownership in that period can be accounted for this factor. Again, the results are in-line with Rosen and Rosen (1980) that predict 25 percent decline. The general equilibrium effects are important. Ignoring the income and price effects should reduce the incentives to own a home even more. When these adjustments are not available, the model predicts a 45 percent decline (from 63 to 53 percent) in ownership.

Date: 2012
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