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Effect of State Usury Laws on Housing Starts in 1966

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  • Strangways, Raymond
  • Yandle, Bruce

Abstract

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.

Suggested Citation

  • Strangways, Raymond & Yandle, Bruce, 1971. "Effect of State Usury Laws on Housing Starts in 1966," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 6(1), pages 665-669, January.
    • Handle: RePEc:cup:jfinqa:v:6:y:1971:i:01:p:665-669_02
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    Cited by:

    1. William Boyes, 1982. "In defense of the downtrodden: Usury laws?," Public Choice, Springer, vol. 39(2), pages 269-276, January.
    2. Arvind Ashta & Laurence Attuel-Mendès & Zaka Ratsimalahelo, 2015. "Another “French paradox”: explaining why interest rates to microenterprises did not increase with the change in French usury legislation," European Journal of Law and Economics, Springer, vol. 40(3), pages 479-509, December.

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