Jim Moody, CAE
CSA President
We were without kids a couple of weeks ago, and Sandi and I took the opportunity for a date night at the bookstore. I know you are wishing you could live a life as exciting as mine, but everyone can’t have that jet-set lifestyle.
Anyway, I noticed a book on the “new nonfiction” table that caught my eye. “
The Housing Boom and Bust” is authored by Thomas Sowell, an economist from Stanford and a syndicated columnist. I thought it would be worth a read to see what he had to say.
Honestly, the first few pages were a disappointment. He started out with basic definitions of the Federal Reserve, Fannie Mae, Freddie Mac and ARMs. Fortunately, it got better quicker. Here are some pearls of wisdom that he casts out:
· The media view our housing crisis as a national problem, and it is if you consider how housing has pulled down the whole economy. But many of the problems that led to economic disaster were local in origin. Drastically overvalued home prices and incredibly high foreclosure rates have been confined to some fairly small areas.
· The spread of laws and policies severely restricting the use of land (open space, saving farmland, protecting the environment, historical preservation, etc.) is a major factor in the unreasonable rise in home values. As one expert said, “The affordability of housing is overwhelmingly a function of just one thing: the extent to which governments place artificial restrictions on the supply of residential land.”
· A prevailing misconception is that the free market failed to produce affordable housing and that government intervention was necessary to allow ordinary people to find a place to live within their means. But the evidence shows that precisely where there has been massive government intervention in the form of severe building restrictions, housing prices have skyrocketed.
· Everyone who took advantage of creative financing was not an idiot or trying to live beyond their means. It is rational to think that your income will go up over time, and it was rational to expect home prices to continue to go up, providing equity. Unfortunately, it was a house of cards.
· On the other hand, low interest rates and lowered eligibility standards for loans allowed many low-income (which often corresponds with less educated) people to buy homes. They were ill prepared to understand the complexities of mortgages and the implications of their choices.
· Members of both political parties are guilty of urging federal regulatory agencies to press banks and other lenders to lower mortgage requirements. They also both passed legislation to subsidize or guarantee loans made under the lowered standards. Presidents of both parties have gone on record that a higher rate of home ownership was desirable.
· When normal people think of affordable housing, they think of something within a person’s means. When politicians talk about affordable housing, they mean that people choose what they want and government finds a way to make it financially possible for them. The reality is, in terms of percent of income required for housing, the U.S. is quite affordable on average.
· The lack of government regulation has been cited as causation for the housing bust. In reality, government intervention to lower mortgage standards and restrict land use were the underlying factors. The trigger was rising interest rates, which had been exceptionally low until the Federal Reserve started raising them to more normal levels in 2004. Monthly payments went up, demand for housing went down, and the wheels fell off.
· There were assertions before the bust that lending institutions unfairly denied minorities for loans based simply on race. The Clinton Administration in particular made it known that banks that looked like they were making decisions on race would face harsh penalties. We now know that over half of the loans to African Americans and 40 percent of the loans to Hispanics were subprime loans, and both groups were hit hard by foreclosure. A careful study of the numbers shows that it was income, net worth and credit scores that banks were looking at – not race. When they had no choice but to increase minority lending, they were being set up for failure.
· The bailout and stimulus bills (one from the end of the Bush term, one from the beginning of the Obama term) are not going to provide significant help until the market has already corrected itself. Few, if any, net jobs will be gained. Ultimately, this spending will increase inflation. In short, doing nothing would have been a better choice for the government.
· Many of the problems that government is seeking to solve right now are the result of previous “quick fix” solutions that were heralded by the very politicians who are castigating those decisions today.
There is much more to the book than I’ve included here. It’s an interesting and fairly quick read. Sowell doesn’t make predictions on when we’ll come out of the mess, and he doesn’t really lay out a road map that we should aim to travel on. But, the book does put in fairly specific terms the lessons we need to learn from the boom and bust so that we aren’t doomed to repeat this ugly season. If you’d like to borrow my copy, just let me know.
I’d like to know what you’ve read recently that was useful. Doesn’t have to be housing-specific.
