There are some differences between the real estate market

Although many are saying that the securitization of mortgages is something brand new history tells another story. What happened in the past in the 1920’s is being repeated with slight variations the present real estate scene. Residential buildings were bundled together and sold as mortgages. Commercial properties too backed by these mortgages as securities.

There was another point of similarity with the CDO’s of today or collateralized debt obligations. It failed in a spectacular manner. These securities were not directly given the backing by properties but were supported by different securities that had the backing of real estate. One of the bonds in the 1920’s was named ‘collateral trust’ security. It had rights on the profits of a building but not on the property itself.

William N. Goetzmann together with Frank Newman in a paper published by National Bureau of Economic Research with the title “Securitization in the 1920’s wrote, “Easily obtainable financing via public capital markets corresponded with an urban construction boom. Regulation and centralization were glaringly absent. Ultimately the size, scope and complexity of the 1920s real estate market undermined its merits, causing a crash not unlike the one underpinning our current financial crisis.”

Regretfully no lessons have been learnt from that financial crisis. There is reference to the stock market crash of 1929 but not much data has been collected on what happened to the real estate securities or even how big the real estate market was at that time. It seems that the securities backed by mortgages made up a sizeable market and it faltered prior to the wavering of the stocks. They further wrote “The breakdown in their valuation, through the mechanism of the collateral cycle, may have led to the subsequent stock market crash of 1929-30.”

Another paper by Professor Goetzmann of International Center for Finance of Yale University (School of Management) together with a former student of Yale, Newman was the first to dig out the available data. Currently Newman is an expert on hedge funds and is working with Protégé Partners. Goetzmann in his teachings focuses both on finances in real estate and in financial history.

He became interested in the matter after finding some old real estate bonds. This made him begin to wonder what story of the past it had to tell. Soon a drama began to unfold outlining the New York horizon. For three years from 1929 right through 1931, 128 constructions higher than 70 meter were built in New York – a record of sorts.

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