Housing Boom and Bust
The same discredited assumptions and the same disregard of repercussions.
By Thomas SowellEDITOR’S NOTE: The following is adapted from Thomas Sowell’s new book, The Housing Boom and Bust.
Let us go back to square one to consider the empirical consequences of policies in the housing market. Politicians in Washington set out to solve a national problem that did not exist — a nationwide shortage of “affordable housing” — and have now left us with a problem whose existence is as undeniable as it is painful. When the political crusade for affordable housing took off and built up steam during the 1990s, the share of their incomes that Americans were spending on housing in 1998 was 17 percent, compared to 30 percent in the early 1980s. Even during the housing boom of 2005, the median home took just 22 percent of the median American income.
What created the illusion of a nationwide problem was that, in particular localities around the country, housing prices had skyrocketed to the point where people had to pay half their income to buy a modest-sized home and often resorted to very risky ways of financing the purchase. In Tucson, for example, “roughly 60% of first-time home buyers make no down payment and instead now use 100% financing to get into the market,” according to the Wall Street Journal. Almost invariably, these locally extreme housing prices have been a result of local political crusades in the name of locally attractive slogans about the environment, open space, “smart growth,” or whatever other phrases had political resonance at the particular time and place.
Where housing markets have been more or less left alone — in places like Houston or Dallas, for example — housing did not take even half as big a share of family incomes as did comparable housing in places like the San Francisco Bay Area, where heavily hyped political crusades had led to severe restrictions on building. It was in precisely these extremely high housing-cost enclaves that the kind of people for whom the national housing crusade expressed much concern — minorities, low-income people and families with children — were forced out disproportionately.
Few things blind human beings to the actual consequences of what they are doing like a heady feeling of self-righteousness during a crusade to smite the wicked and rescue the downtrodden. Statistical studies about disparities between blacks and whites in mortgage loan approval rates might be said to have “jump-started” the housing crusades that began in the 1990s. Politicians and the media led this crusade, with many community activists following in their wake, much like scavengers, able to extract large sums of money from banks and other institutions by raising claims of discrimination, whose power to delay government approval of bank mergers and other business decisions made pay-offs to these activists the only prudent course for those accused.
Even where loudly proclaimed concern for the poor and minorities gave impetus to the drive for over-riding traditional mortgage lending standards, this is not to say that the poor and minorities were the sole beneficiaries or even the main beneficiaries. When you open the floodgates, you cannot tell the water where to go. Housing speculators — “flippers” — found the new and looser home mortgage rules a bonanza. So did many others. It is by no means clear that the poor or minorities came out ahead at all, after the housing boom turned to bust and many were left with mortgage payments they couldn’t meet on homes they couldn’t afford.
With rich rewards available — politically, ideologically, and financially — from the “affordable housing” crusade, there were ample incentives to keep this crusade going for years. Meanwhile, various special interests found ways to benefit themselves from all this, whether as home builders, real-estate investors, or others, and therefore added their voices in support of the open-ended goal of more home ownership through various ways of achieving, or seeming to achieve, affordable housing. Supporters of such policies and programs easily drowned out the voices of those economists and others who increasingly warned of the risky financial arrangements that were behind the statistics on the growing numbers of home buyers that were so triumphantly being paraded as fruits of the crusade for affordable housing and the stamping out of mortgage lending discrimination.
In short, this was a crusade that was feeding on its own successes by its own criteria, and was not likely to stop unless it got stopped.
The housing market collapse dealt a blow to some of the devices that fed the crusade — “creative” financing and lax lending standards, for example — but even the ensuing national crisis did nothing to end the political attractiveness of the goal of making housing affordable by government fiat, rather than by individuals buying or renting housing that was within their own income range. Just as the utter discrediting of public housing projects did not discredit the underlying beliefs that caused such projects to be built, so in this case even the more widely disastrous consequences of the affordable-housing crusade have led only to seeking other ways of carrying on that same crusade, based on the same discredited assumptions and the same disregard of repercussions.
While some congressional Democrats have proposed a moratorium on mortgage foreclosures or allowing judges to change the terms of mortgage contracts, Senate Republicans have proposed “providing government-backed, 4% fixed mortgages to any credit-worthy borrower.” What these proposals from politicians of both parties all have in common is an utter absence of any serious consideration of the repercussions in multiple directions of arbitrary government fiats.
Anyone who expected any such consideration of repercussions by most members of either political party would have little chance of avoiding painful disappointments. Certainly few politicians of either party have questioned whether the track record of politicians in the housing market justified more of the same in other markets. Many are in fact eager to extend political intervention into other industries receiving the government “stimulus” or bailout money.
Before we go forward as a nation, it is well to look at where we have been, despite being urged to take drastic actions immediately — and, in fact, especially when being urged to take drastic actions immediately.
Whether we look at the American economy in general or the housing market in particular, we see a history of remarkable progress for generation after generation — and a few recent years when things turned very bad, very quickly.
It has been almost axiomatic, for at least a century, that the American economy produces more output than any other economy in the world. All this is so much taken for granted that no one considers it worth commenting on the fact that 300 million Americans today produce more output than more than a billion people in India or an even larger population in China — indeed, more than these two countries which, put together, have more than eight times the population of the United States. We also produce more than Japan, Germany, Britain, and France combined.
The housing market has, of course, changed drastically in the past few years, as have other things in the economy. But does all this suggest that (1) we need to change some recent bad policies or that (2) we need to restructure a whole economic system that has worked well for centuries? More specifically, does it mean that we need to allow politicians a bigger say in how American businesses are run?
Lenders did not spontaneously begin to lend to people who would not have qualified for loans under the traditional criteria that had evolved out of years of experience in the market. Such risky loans were made under growing pressures from government regulatory agencies and politicians, and even threats of prosecution from the Justice Department if the statistical profiles of borrowers whose loan applications were approved did not match the government’s preconceptions.
The growth in subprime loans was one way of meeting arbitrary quotas for lending to people who did not meet the criteria for loan approval that had prevailed for years. Quota lending was one of many political patches put over problems caused by previous political “solutions.” Often these interventions have focussed on some limited goal, with no real concern about, or even awareness of, the wider ramifications of what they were doing. It is doubtful whether most of the state politicians of the past who enacted laws to prevent branch banking had anything in mind more far-reaching than enabling local banks to avoid having to compete with branches of much bigger and better-known banks. It seems even less likely that these local politicians felt any responsibility for the thousands of bank failures during the Great Depression of the 1930s.
Nor is it likely that the national politicians of our own times, who for years made “home ownership” the touchstone of housing policy, will acknowledge any responsibility for the financial disasters and widespread unemployment today.
What that means is that the voting public must at a minimum be skeptical of political spin, no matter how often it is echoed in the media. What would be even better would be to develop some sense of awareness that everything “is interconnected in the world of prices, so that the smallest change in one element is passed along the chain to millions of others.” It is a caution especially apt when someone is pushing the political crusade of the day as an overriding “good thing,” whether home ownership, mortgage foreclosure mitigation, or a restructuring of the whole economy.
The very idea that the current economic crisis will go to “waste” if it is not used by politicians to rush through a fundamental restructuring of the economy, while the public is too panicked to object, should at the very least give us pause, if not set off alarm bells. From the standpoint of those who seek to remake the economic institutions of America, the worst case scenario would be to have the economy begin visibly recovering on its own before they can get their blueprint for salvation enacted into law. The urgency behind the hasty passage of the “stimulus” legislation was real, even if the reason for that haste was not a swift economic recovery.
Will the history of the New Deal and the Great Depression repeat itself? There is, of course, no way to know in advance. However, history has repeated itself many times before, when past experience has been ignored — and especially when past mistakes have been repeated, often in the name of doing something new and different. Comments made years ago by distinguished British historian Paul Johnson remain very apt in our times:
The same discredited assumptions and the same disregard of repercussions.
By Thomas SowellEDITOR’S NOTE: The following is adapted from Thomas Sowell’s new book, The Housing Boom and Bust.
Let us go back to square one to consider the empirical consequences of policies in the housing market. Politicians in Washington set out to solve a national problem that did not exist — a nationwide shortage of “affordable housing” — and have now left us with a problem whose existence is as undeniable as it is painful. When the political crusade for affordable housing took off and built up steam during the 1990s, the share of their incomes that Americans were spending on housing in 1998 was 17 percent, compared to 30 percent in the early 1980s. Even during the housing boom of 2005, the median home took just 22 percent of the median American income.
What created the illusion of a nationwide problem was that, in particular localities around the country, housing prices had skyrocketed to the point where people had to pay half their income to buy a modest-sized home and often resorted to very risky ways of financing the purchase. In Tucson, for example, “roughly 60% of first-time home buyers make no down payment and instead now use 100% financing to get into the market,” according to the Wall Street Journal. Almost invariably, these locally extreme housing prices have been a result of local political crusades in the name of locally attractive slogans about the environment, open space, “smart growth,” or whatever other phrases had political resonance at the particular time and place.
Where housing markets have been more or less left alone — in places like Houston or Dallas, for example — housing did not take even half as big a share of family incomes as did comparable housing in places like the San Francisco Bay Area, where heavily hyped political crusades had led to severe restrictions on building. It was in precisely these extremely high housing-cost enclaves that the kind of people for whom the national housing crusade expressed much concern — minorities, low-income people and families with children — were forced out disproportionately.
Few things blind human beings to the actual consequences of what they are doing like a heady feeling of self-righteousness during a crusade to smite the wicked and rescue the downtrodden. Statistical studies about disparities between blacks and whites in mortgage loan approval rates might be said to have “jump-started” the housing crusades that began in the 1990s. Politicians and the media led this crusade, with many community activists following in their wake, much like scavengers, able to extract large sums of money from banks and other institutions by raising claims of discrimination, whose power to delay government approval of bank mergers and other business decisions made pay-offs to these activists the only prudent course for those accused.
Even where loudly proclaimed concern for the poor and minorities gave impetus to the drive for over-riding traditional mortgage lending standards, this is not to say that the poor and minorities were the sole beneficiaries or even the main beneficiaries. When you open the floodgates, you cannot tell the water where to go. Housing speculators — “flippers” — found the new and looser home mortgage rules a bonanza. So did many others. It is by no means clear that the poor or minorities came out ahead at all, after the housing boom turned to bust and many were left with mortgage payments they couldn’t meet on homes they couldn’t afford.
With rich rewards available — politically, ideologically, and financially — from the “affordable housing” crusade, there were ample incentives to keep this crusade going for years. Meanwhile, various special interests found ways to benefit themselves from all this, whether as home builders, real-estate investors, or others, and therefore added their voices in support of the open-ended goal of more home ownership through various ways of achieving, or seeming to achieve, affordable housing. Supporters of such policies and programs easily drowned out the voices of those economists and others who increasingly warned of the risky financial arrangements that were behind the statistics on the growing numbers of home buyers that were so triumphantly being paraded as fruits of the crusade for affordable housing and the stamping out of mortgage lending discrimination.
In short, this was a crusade that was feeding on its own successes by its own criteria, and was not likely to stop unless it got stopped.
The housing market collapse dealt a blow to some of the devices that fed the crusade — “creative” financing and lax lending standards, for example — but even the ensuing national crisis did nothing to end the political attractiveness of the goal of making housing affordable by government fiat, rather than by individuals buying or renting housing that was within their own income range. Just as the utter discrediting of public housing projects did not discredit the underlying beliefs that caused such projects to be built, so in this case even the more widely disastrous consequences of the affordable-housing crusade have led only to seeking other ways of carrying on that same crusade, based on the same discredited assumptions and the same disregard of repercussions.
While some congressional Democrats have proposed a moratorium on mortgage foreclosures or allowing judges to change the terms of mortgage contracts, Senate Republicans have proposed “providing government-backed, 4% fixed mortgages to any credit-worthy borrower.” What these proposals from politicians of both parties all have in common is an utter absence of any serious consideration of the repercussions in multiple directions of arbitrary government fiats.
Anyone who expected any such consideration of repercussions by most members of either political party would have little chance of avoiding painful disappointments. Certainly few politicians of either party have questioned whether the track record of politicians in the housing market justified more of the same in other markets. Many are in fact eager to extend political intervention into other industries receiving the government “stimulus” or bailout money.
Before we go forward as a nation, it is well to look at where we have been, despite being urged to take drastic actions immediately — and, in fact, especially when being urged to take drastic actions immediately.
Whether we look at the American economy in general or the housing market in particular, we see a history of remarkable progress for generation after generation — and a few recent years when things turned very bad, very quickly.
It has been almost axiomatic, for at least a century, that the American economy produces more output than any other economy in the world. All this is so much taken for granted that no one considers it worth commenting on the fact that 300 million Americans today produce more output than more than a billion people in India or an even larger population in China — indeed, more than these two countries which, put together, have more than eight times the population of the United States. We also produce more than Japan, Germany, Britain, and France combined.
The housing market has, of course, changed drastically in the past few years, as have other things in the economy. But does all this suggest that (1) we need to change some recent bad policies or that (2) we need to restructure a whole economic system that has worked well for centuries? More specifically, does it mean that we need to allow politicians a bigger say in how American businesses are run?
Lenders did not spontaneously begin to lend to people who would not have qualified for loans under the traditional criteria that had evolved out of years of experience in the market. Such risky loans were made under growing pressures from government regulatory agencies and politicians, and even threats of prosecution from the Justice Department if the statistical profiles of borrowers whose loan applications were approved did not match the government’s preconceptions.
The growth in subprime loans was one way of meeting arbitrary quotas for lending to people who did not meet the criteria for loan approval that had prevailed for years. Quota lending was one of many political patches put over problems caused by previous political “solutions.” Often these interventions have focussed on some limited goal, with no real concern about, or even awareness of, the wider ramifications of what they were doing. It is doubtful whether most of the state politicians of the past who enacted laws to prevent branch banking had anything in mind more far-reaching than enabling local banks to avoid having to compete with branches of much bigger and better-known banks. It seems even less likely that these local politicians felt any responsibility for the thousands of bank failures during the Great Depression of the 1930s.
Nor is it likely that the national politicians of our own times, who for years made “home ownership” the touchstone of housing policy, will acknowledge any responsibility for the financial disasters and widespread unemployment today.
What that means is that the voting public must at a minimum be skeptical of political spin, no matter how often it is echoed in the media. What would be even better would be to develop some sense of awareness that everything “is interconnected in the world of prices, so that the smallest change in one element is passed along the chain to millions of others.” It is a caution especially apt when someone is pushing the political crusade of the day as an overriding “good thing,” whether home ownership, mortgage foreclosure mitigation, or a restructuring of the whole economy.
The very idea that the current economic crisis will go to “waste” if it is not used by politicians to rush through a fundamental restructuring of the economy, while the public is too panicked to object, should at the very least give us pause, if not set off alarm bells. From the standpoint of those who seek to remake the economic institutions of America, the worst case scenario would be to have the economy begin visibly recovering on its own before they can get their blueprint for salvation enacted into law. The urgency behind the hasty passage of the “stimulus” legislation was real, even if the reason for that haste was not a swift economic recovery.
Will the history of the New Deal and the Great Depression repeat itself? There is, of course, no way to know in advance. However, history has repeated itself many times before, when past experience has been ignored — and especially when past mistakes have been repeated, often in the name of doing something new and different. Comments made years ago by distinguished British historian Paul Johnson remain very apt in our times:
The study of history is a powerful antidote to contemporary arrogance. It is humbling to discover how many of our glib assumptions, which seem to us novel and plausible, have been tested before, not once but many times and in innumerable guises; and discovered to be, at great human cost, wholly false.
– Thomas Sowell is a syndicated columnist and a scholar in residence at theHoover Institution. This is adapted from his new book, The Housing Boom and Bust.
