Real Estate

The Homestead Act

Shortly after the signing of the Constitution, the federal government began transferring one billion acres of land to private owners through land sales and land grants. In the 1830s, for example, the government sold 20 million acres at roughly $1.25 per acre. This sounds like a bargain to us today, but at the time, the vast majority of citizens couldn’t afford that price. Consequently, a grassroots group called the Free Soil Movement formed and lobbied the government for an alternate method of distributing land. The Homestead Act of 1862 was Congress’s answer to the appeal. Settlers who did not already own what was considered a "judicious" amount of land were given title to 160 acres for each adult in the family. There were no money exchanges. Instead, there was an understanding that the settlers would live on and improve the land for a period of at least five years. This program was very successful and similar federal land distribution programs followed until the later part of the 19th century. In total, the U.S. government distributed more than 300 million acres of public property to private landowners through the Homestead Act, creating the basis for the real estate market. For the first time in the history of the young country, there was a system in place by which one landowner could transfer property rights to another through sale, lease, or trade. This led to a tremendous amount of speculation. Some investors accumulated a tremendous amount of wealth while others lost everything.

Growth of Cities and Suburbs

At the end of the 19th century, America was transitioning from an agricultural society to a manufacturing economy. Citizens flocked to urban areas to work at burgeoning factories. For example, as the Midwest’s industrial center, Chicago reached a population of one million people more rapidly than any other city in history. Settled in the 1830s, the city grew from less than 1,000 inhabitants to become the fifth largest city in the world by 1900.

The values of urban properties skyrocketed. By 1920, 50 percent of America’s population lived in cities. This urban density created opportunities for real estate development as housing, office buildings, industrial facilities, hotels, and retail centers were constructed to meet the demands of city dwellers. Skyrocketing property values and associated costs began pushing people and businesses outside the city, just as advances in transportation made living outside the city easier. Suburbs, communities just outside urban centers, began to spread. Developers made these planned communities attractive by building along the transportation routes so people could easily commute to their jobs in the cities.

Technological advances influenced the building boom of the 1920s. Communities were wired for electricity, and new machines such as elevators helped meet additional demand for space and allowed the construction of ever-taller buildings. Planned communities began taking shape in the suburbs, while skyscrapers changed the way the cities looked. One hundred buildings higher than 25 stories were constructed in this decade, most of them in New York City, with Chicago a distant second.

New Deal Programs for Real Estate Financing

The Great Depression crippled most industries – including real estate. Values dipped below debt levels, causing a collapse. The federal government put the domestic financial markets through a major overhaul and was shrewd enough to include real estate financing as part of the New Deal programs. The Federal Housing Administration (FHA) was created in 1930 to provide mortgage insurance, lowering the risk on real estate loans and making lending more palatable for savings and loans and banks. The government also created the Federal Home Loan Bank System (FHLB) to supervise and regulate local banks. In 1938, the Federal National Mortgage Association (FNMA or Fannie Mae) was created to provide a secondary mortgage market as well as to lure investment capital in the mortgage market, and continues to play an important role in supplying capital to the mortgage market today. These New Deal programs ultimately made the real estate finance market more sophisticated and secure.

Redlining

The practice of redlining began during the New Deal in the 1930s, when the federal government deemed minority neighborhoods as “high risk” investments and steered private mortgage investors away from them. The property values of homes in inner-city minority neighborhoods plummeted because of this discrimination. Of the federally insured home loans that were granted between 1945 and 1959, African Americans received only 2 percent. Redlining also had a dramatic, and lasting, effect on black and minority communities because it prevented families from passing on wealth to the next generations. The Fair Housing Act of 1968 made the practice of redlining illegal. Today, any practice by lenders of ranking neighborhoods to determine loan payments can be considered a modern equivalent of redlining. Neighborhoods are ranked on a one-to-five scale and those that receive a five are deemed the riskiest for lenders, who may ask for higher down payments on loans than they would for homes in other neighborhoods. Court cases over this discriminatory practice continue to this day.

World War II and Postwar Recovery

America and the real estate industry slowly climbed out of the Depression only to fall headlong into World War II. Development was put on hold during the war, but once the GIs returned from overseas, another era of prosperity began. A tremendous amount of demand for housing emerged virtually overnight. By 1946, new housing construction quadrupled to over 500,000 homes. In the postwar period, a white picket fence and peaceful green lawn proved very appealing. Two-thirds of the 15 million homes built in the 1950s were in the suburbs. The decade was also a period of expansion for the highways, which provided access to more areas by car and truck. This enabled all types of real estate, e.g., hotels, industrial and retail centers, to be located further outside the city. Hotel chains like Holiday Inn started popping up along roadways across the country. The suburban shopping mall also became popular in this era.

As the suburbs grew, the cities slumped. By 1960, many urban centers hadn’t seen new office building development in 30 years. The decay of America’s urban areas didn’t go unnoticed. In 1965, community activism and political pressure led to the creation of a cabinet position focused on improving urban housing – what today is known as the Department of Housing and Urban Development (HUD).

The 1970s were marked as a period of "stagflation," which is stagnant economic growth with monetary inflation. Inflation drove speculation and rising prices in real estate even though fundamentals languished. The speculative rally in real estate values peaked by the late-1970s and led into the recession of the early 1980s. As the economy recovered, the government changed the tax law, creating tax shelters in real estate, such as increasing depreciation deductions, which resulted in a building boom across asset classes. Loose bank lending helped to finance the boom. In 1986, tax reform eliminated some tax advantages of owning real estate and construction fell off.

Recession, Pandemic, and Recovery

Through the early 1990s, the industry battled oversupply, a recession, lending cutbacks, and bank failures. Over the next decade, growth service and technology industries helped demand catch up with supply. New buildings once again began to sprout by the turn of the century, and residential housing began running on all cylinders as more buyers entered the market due to both newfound access to financing (thanks to the boom in securitization) and speculation. Home builders ramped up supply. Around 2006, most U.S. residential markets peaked and began to collapse. In 2007, the economy started to decline and, with it, the commercial real estate market slowed down. The credit crisis ensued.

The real estate industry faced challenges after the boom fueled by loose lenders and overzealous buyers. It rebounded until the pandemic, which caused lockdowns and an economic slowdown. As more organizations adapted to remote work setups, vacancies in commercial real estate properties increased. On the flip side, the demand for residential properties grew dramatically during the pandemic, to the point where there was insufficient inventory to meet the high demand. In some regions, housing values reached record heights. The real estate industry is slowly but steadily recovering post pandemic and continues to be one of the most dynamic industries in the American economy. People may divest their stocks, but they always need a place to live, work, and shop.