ECON 2200 Chapter Notes - Chapter 25: Ford Model T, Durable Good, Balloon Payment Mortgage

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9 Feb 2017
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III. By 1923, US economy had fully recovered: "The Roaring 20s"
Characterized by:
A. Urban migration: reflects the continuing growth of manufacturing
especially among African-Americans increase D for manufacturing labor (especially
after immigration restrictions of mid-1920’s)
By 1920, over 50% of Americans (≈ 54 million) are living in urban areas
B. Growth of the “Consumer Culture”
Increased purchases & ownership of consumer durables (Table 22.1)
o 1922-1929: Growth in consumer durables purchases ≈ 8.3% per year
o Linked to growing network of dependable electrical power supply
o Warning! Consumer durables market is highly correlated with the business cycle.
o Widespread ownership of automobiles
Ford Model T (video clip): over 15 million produced 1908-1927
Extremely affordable
1913: Ford introduced mechanized, conveyor-belt assembly line
Further specialization and division of labor
Reductions in per-unit cost economies of scale
Reductions in price
1908: about $850 // by mid 1920’s: < $300
↑ Government support for (paved) road-building (p. 400)
Automobile ownership linked to suburban growth and increased leisure
demand.
Increased demand for service stations, hotels, restaurants, etc.
o ↑ consumer credit & installment plans: “Buy now, pay later.” increased
purchases of consumer durables
Durable Consumer
Good
% purchased on
credit in1925
Radios
75%
Household Appliances
80%
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Furniture
70%
Automobiles
75%
% of goods that were purchased on credit ^ (the good itself provides collateral for the credit)
o advertising (radio & print). Ads provided info on:
new products
prices
installment plans
the ads stimulate demand for products and further encouraged the growth of C
C. Construction Boom
Single-family & multi-family homes:
Year
New Housing Starts
(includes rental & owner-occupied)
1920
247,000
1925
937,000
1929
509,000
Contribute to the growth of I, especially in 1920-1925
Also growth in construction of commercial buildings & infrastructure
In aggregate, real housing prices (and supply) rose until about 1925, then began to fall.
most economists believe market saturation was present by 1925 (supply was growing
faster than demand) which led to falling prices
Home mortgage debt outstanding increased steadily throughout the 1920s (even after
1925).
o Typical mortgage:
5-year term with balloon payment at end
Refinancing at end of term was common.
Homebuyers accumulated equity very slowly. a lot of the payments were
going towards interest
o ↑ mortgage debt (& refinancing) was not a big problem as long as incomes &
property values were also ↑.
If property values start falling, it will lead to an increase in defaults and banks are less willing to
refinance
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