There is no such thing as a free lunch.

The Housing Boom and Bust

I just finished reading Stanford economist Thomas Sowell‘s new book, The Housing Boom and Bust. It’s a really easy read, not too technical, but filled with a lot of good statistics. The thesis of the book can basically be summed up by the following paragraph:

In a complex story about intricate financial arrangements, it is possible to lose sight of a plain and fundamental fact – that behind all the esoteric securities and sophisticated financial dealings are simple, monthly mortgage payments from millions of home buyers across the country. When many of those payments stop coming, no amount of financial expertise in Wall Street or government regulatory intervention from Washington can save the whole investment structure built up on the foundation of those mortgage payments.

The bedrock question then is: Why did so many monthly mortgage payments stop coming? And the bedrock answer is: Because mortgage loans were made to more people whose prospects of repaying them were less than in the past. Nor was this simply a matter of misjudgment by banks and other lenders. The political pressures to meet arbitrary lending quotas, set by officials with the power of economic life and death over banks and over Fannie Mae and Freddie Mac, led to riskier lending practices than in the past.”

I wish Sowell wrote more about the effect of credit default swaps and other complex financial derivatives, but he pretty much dismisses those as “downstream effects”, while the real cause of the crisis was that people were living in homes they couldn’t afford, due to the political pressures on banks and regulators to lend or allow lending to those people, in the name of “affordable housing”.

Sowell also raises an interesting argument that I haven’t heard before. He says that the boom in real estate prices was really a local issue, and that most communities across the country did not see prices rise much more than inflation and incomes. In localities such as coastal California, Miami, Phoenix, Las Vegas, etc. land use restrictions were put in place to limit the land available for building homes. For example, in bubble areas such as San Mateo County in California, more than half of all land is designated as “open space” and cannot be developed. In places like Houston and Dallas, which have no such restrictions and which have seen incomes rise faster than the national average, there was no housing bubble. He argues that such land use restrictions are often put in place by wealthy elites in the name of environmental friendliness, smart planning, or protecting the community from urban sprawl. It has the secondary effect of artificially raising the home values for the people that already live in the community. Furthermore, he argues that these restrictions are unconstitutional, as it allows people to restrict building on land (the “open spaces”) that they do not own.

Sowell also leaves us with this discouraging statement regarding President Obama and his various economic interventions:

Whatever its shortcomings economically, what government job creation programs can do politically is create a large class of people beholden to the government and likely to vote for those who gave them jobs in hard times. The political success of the New Deal is beyond dispute. That FDR could be re-elected in a landslide in 1936 and re-elected again to an unprecedented third term in 1940, despite never having gotten unemployment down into single digits during his first two terms, is a sign that President Obama may also be able to succeed politically, even if his policies turn out to be an economic disaster for the country as a whole.”



1 Badtux { 08.18.09 at 4:29 am }

Some interesting facts:

1. Half of San Mateo County (where I live) is open space BECAUSE IT IS MOUNTAINS. The San Andreas Fault runs up San Mateo County, and on either side the land is pushed up into mountains that are unbuildable because of the fault and the unstable geology of the mountains themselves, which have a bad tendency to slide downhill whenever it rains. There would be no housing built on those mountains if it wasn't open space, there would just be cattle run on them, or it'd be tree farms to be harvested for lumber. I've been all up and down San Mateo County, both on the surface streets and in the mountains, and every single buildable inch in San Mateo County is built. In short, Thomas Sowell is being a dishonest liar to imply that land use ordinances have put half of San Mateo County off-limits to building — no, simply geology did that. At this point, the question becomes not whether Sowell is a liar, but how BIG of a liar.

2. GOVERNMENT-REGULATED LENDERS ONLY LENT 25% OF THE MORTGAGE LOANS DURING THE BOOM. The vast majority of sub-prime lenders were non-bank lenders such as Countrywide Finance that were UTTERLY UNREGULATED, roughly 95% of sub-prime loans were issued by unregulated lenders and collateralized via the CDO market rather than via Fannie/Freddie (which were restricted by law to lending a maximum of 10% of their portfolio to subprime and Alt-A), thus blaming regulation for causing the housing boom and bust is utter nonsense. Once again Sowell is being dishonest.

3. FDR's success was as much a failure of his Republican opposition as anything else. His Republican opposition had no policy alternatives to offer other than the same ones that had gotten the country into depression in the first place. Obama appears to be blessed with his opposition too. Nutcases ranting about nonsensical "death panels" and waving guns around outside of Obama rallies make Obama's opponents look like deranged nutcases and discredit any conservative opposition to Obama's policies, as does the utter lack of any policy alternatives on the part of GOP politicians other than vague hand-waving that doesn't pass basic credibility tests because they had power for six years prior to 2006 and didn't do any of what they now say they're going to do. The fact that Obama's policies have thus far been exactly the policies that he promised on his web site — there have been no unpleasant surprises, Obama has pushed exactly the agenda that he said he was going to push — also helps, because the voting public would have to admit that they were wrong to vote for that agenda, and American voters are famously reluctant to admit they were wrong. I am thus far neither impressed nor disappointed in Obama's performance — the best you can say is, I'm waiting to see whether he's going to deliver or not and reserving judgement until it's clear whether he's delivered or not (much as I did during George W. Bush's first year in office, I didn't really give up on Bush until he did the crazy thing of invading Iraq despite his daddy telling him exactly what was going to happen if he did so) — but you must admit that Obama is blessed in his opponents, who are spewing crazed nonsense through spittle that makes them look like deranged maniacs compared to Obama's cool.

So anyhow: That's the truth about San Mateo County as vs. Thomas Sowell's lie. Personally, once I catch someone in one lie, I give up on them, because then the question is not whether they are a liar, but, rather, how BIG a liar. The fact that I caught Sowell in two lies here, well. So it goes. Some people just put their ideology ahead of truth in their priorities list, alas.

2 Shailesh { 11.14.09 at 3:12 pm }

You have hidden interest in protecting San Mateo home values as you benefit from such policies. Your Lie is much more evident.

3 Badtux { 11.14.09 at 5:37 pm }

Actually I do not own a home in San Mateo county, I live in an apartment and am saving money for a home. So I benefit if San Mateo home prices *fall* because then I will be able to afford a home sooner. Your transparent content-free ad-hominem attack is typical of today's right-wing. Somewhere, the ghosts of WIlliam F. Buckley Jr. and Barry Goldwater weep at what the party of intellectual rigor has turned into.

4 penguin for dinner { 11.30.-1 at 12:00 am }

well there's a difference between being incorrect and being a liar. otherwise you would have just proven yourself a liar.

Edward Glaeser, one of the world's preeminent experts on urban economics, has drawn the same conclusions as Sowell – namely, that building restrictions throughout the latter part of the 20th century have artificially constrained the supply of new homes in the Bay Area: Part of it may be land sitting idle, but also strict building codes, approval delays, low density zoning requirements, etc are part of the problem.

driving around san mateo county in your prius doesn't substitute for actual research. maybe you should go do some homework before just spouting off and calling reputable economists from world-class institutions liars.

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