The modern mortgage set the stage for the US baby boom

Birth rates in the US began to grow dramatically between 1935 and 1960, a period commonly known as the “baby boom.” Concurrent with the baby boom, there was also a dramatic growth in US home ownership that was especially concentrated in young families. A contributor to this rise in home ownership was the introduction of the Federal Housing Administration (FHA) mortgage insurance program in 1934 and the Veterans Administration (VA) mortgage loan guarantee program in 1944, which dramatically decreased down payments and are credited with standardizing the high loan to value (LTV) rate that remains the norm today. In a paper by Faculty Associate Melissa Kearney and colleague Lisa Dettling, the “government-led revolution in housing finance” is examined empirically to determine if it laid the foundation for the US baby boom. 

To empirically examine the effects of the FHA and VA loan programs on the baby boom rates, state-by-year data from multiple sources were compiled. For mortgages, state-year data on FHA and VA loan counts were digitized from the FHA and VA annual reports. For births, state-year-race group birth counts from Vital Statistics reports were digitized. The data was then used to estimate two-way fixed effects ordinary least squares (OLS) regressions relating FHA and VA loan counts in a specified year to births the following year, controlling for state and year fixed effects. The regression models also control for state-year population and income, both of which were obtained from the Census and Bureau of Economic Analysis. 

The OLS estimates suggest that in state-years in which more FHA and VA loans originated, there were more conceptions that resulted in a live birth the following year. The evidence is consistent with the hypothesis that the “preferential mortgages led to an increase in subsequent fertility, presumably through increased home ownership.” However, to address the possibility of bias (reverse causality or omitted variables), a novel instrumental variables (IV) strategy was proposed to isolate supply-side variation in loan availability based on lenders willingness and ability to issue government backed mortgages. The IV results confirm the OLS findings that government-backed mortgage issuance leads to increases in child-bearing the following year. Kearney and Dettling found ”that for each 1,000 additional mortgages issued in a state-year, there are about 309 additional births in the following year.”