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Effect of State Usury Laws on Housing Starts in 1966

Published online by Cambridge University Press:  19 October 2009

Extract

During the “credit crunch” of 1966, starts of single-family residences fell 19.2 per cent, from 964,000 to 779,000. At that time, 10 states had usury laws limiting the maximum nominal interest rate that could be charged to individuals on residential mortgages to 6 per cent. When interest rates rose to high levels in 1966, there were widespread complaints that this artificial restriction caused residential construction to decline by even larger amounts in those states having 6 per cent usury laws as lenders shifted funds to other states not having this restriction. However, when nominal interest rates rise to the legal maximum, mortgages trade at a discount and the effective yield rises above the legal rate. Presumably, it is the effective yield, not the nominal rate, that is relevant for directing the flow of funds into alternative investments. Thus, there is good reason to doubt that the usury laws did restrict residential construction in spite of the contention by those in the mortgage and construction industries. The purpose of this study is to determine if—and if so, to what extent—state usury laws caused a decline in residential construction in 1966.

Type
Communications
Copyright
Copyright © School of Business Administration, University of Washington 1971

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References

1 Delaware, Maryland, New Jersey, New York, North Carolina, Pennsylvania, Tennessee, Vermont, Virginia, and West Virginia. The Mortgage Banker (October 1966), p. 27.

2 U.S. Bureau of the Census, Construction Reports, C42–65–13, pp. 5ff and C40/C42–66–13, pp. 10ff.