The Housing Boom and Bust: Revised Edition (Anglais) Broché – 23 février 2010
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Now completely revised in paperback, The Housing Boom and Bust is designed to unravel the tangled threads of that story. It also attempts to determine whether what is being done to deal with the problem is more likely to make things better or worse.
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Sowell begins with an accounting of how housing prices across the U.S. diverged from their relatively low prices of the early 1970s, especially along the California coast. The "standard" for housing expenditures used to be about 25% of gross income - this recently grew to as high as 60% in some areas (eg. Salinas, California).
Sowell contends that a major cause for California's rapid rise, beginning in the 1970s, was land restrictions that set aside areas for "open space," "protecting the environment," "historical preservation," etc. (The population increase during that period was almost equal to the national increase rate.) He cites an international study of urban areas around the world that found 23 of 26 areas with the highest land-price increases had strong "smart-growth" policies. Minimum lot-size laws also raise land costs of building a house - here, he points to Houston (incomes rose faster there than in the nation overall, but also lacks zoning laws) and a Coldwell Banker estimate that homes there costing $155,000 would cost over $1 million in San Jose.
Sowell goes on to point out that first-time buyers are limited in their ability to provide a large down-payment - averaging less than $30,000, vs. over $100,000 for repeat buyers. Meanwhile, housing prices began to escalate (the extreme was probably March, 2005 in San Mateo County where they rose $2,000/day), and houses moved rapidly (median time a home was on the MLS in California was less than 2 weeks in 2004, and just over that in 2005).
But, I'm getting ahead of things. Prior to the rapid escalation of home prices, federal bank regulators began using the 1977 Community Reinvestment Act (CRA) to press for racial equality. The issue was the statistical difference in approval rates, not a claim that most blacks could not get mortgage loans. New regulations required that the banks not just look for qualified buyers, but make a requisite number of loans to low and moderate income buyers (quotas). Then, when legislation was proposed in 1999 to permit banks to diversify into selling investment securities, the Clinton White House urged "banks given unsatisfactory ratings under the CRA be prohibited from enjoying the new diversification privileges." The Congress happily obliged. Another factor was HUD's beginning legal action in 1993 against mortgage bankers that declined a higher percentage of minority applicants. HUD also set a 42% target for Freddie Mac and Fannie Mae (FM & FM) to buy mortgages for people whose income were less than an area's median. Banks, sensing that FM & FM were implicitly guaranteed, where only too happy to not only issue these mortgages, but to buy FM & FM debt as well. (In 2003, about 3,000 banks held FM & FM debt for 100% of their capital requirements.) The "icing" was FM & FM's creative accounting that misclassified $11 trillion of sub-prime assets. Then in 2002, Bush II urged Congress to pass the American Dream Down Payment Act, subsidizing down payments of prospective buyers with incomes below a certain level.
Sowell has now set the stage, and readers have no problem understanding what happened. Interest-only teaser rate ARMs rose to counter rising prices and down-payments. By 2005, interest-only mortgages had risen to 31% of all new mortgages, up from less than 10% in 2002. In Denver, Seattle, and Phoenix it was 40%, and 66% in the S.F. Bay area. Speculators jumped into the fray (28% in 2005, 22% in 2006) adding further fuel to the fire, and happy homeowners took out $1.13 trillion in home equity loans in 2007. However, the storm on the horizon was the rise of interest rates to avoid inflation (1% in 2004, to 5.25% in 2006), making monthly payments more expensive and reducing the demand and prices for housing, and everyone takes a loss - including the banks (about $40,000 per foreclosed house), and especially speculators, minorities, and those with ARMs and interest-only loans. (Interesting Note: As of October, 2008, 7% of Bank of America's mortgages were CRA lendings, and 24% of its defaults.) Bailing out FM & FM, with their sub-prime laden inventories, cost the government more than that for all the private banks put together.
Sowell also has no problems believing that many sub-prime loans were foisted upon unaware and uninformed buyers by predatory lenders - especially involving contracts for repairs or remodeling on credit.
Bottom Line: The law of unintended consequences strikes again - helping minorities was a good intention, but backfired. We're all to blame, though admittedly some more than others. Deregulation was not the problem, rather misguided regulation. Further, the economy is not likely to reach former levels for a LONG time, lacking the frenzy the rapidly rising home prices brought to consumer buying.
The frightening part is that those in government who put the practices into place that led to the economy collapsing like a house of cards are still in power and running things in Congress, and the new administration sees the crisis as an excuse to implement policies that will have far reaching effects on the future of this country.
If there is one flaw in the book I would have liked Sowell to go into detail about the use of subprime backed securities that caused toxic assests to infiltrate every aspect of our economy and the economy of the world.
Thomas Sowell has done it again. Using his inimitable clarity, he analyzes just went wrong with the housing market, and how it contributed to a cascading, international financial crisis. The short answer? Government attempts to "create affordable housing" for lower income Americans. Who could oppose that goal? Unfortunately, the goal bore no relation to the actual consequences of the policies. A series of decisions over a number of years led to a degrading of eligibility standards on mortgages. This not only created a housing bubble. It filled the financial system with extremely risky, and unsustainable, financing schemes that would never have existed if the federal government had not attempted to manipulate the market in the first place.
The book is remarkably timely. Sowell applies his analysis to the current "stimulus" plan, and suggests that the Obama administration is using the crisis "to fundamentally and enduringly change the institutions of American society." Sound harsh? Here's what President Obama's chief of staff Rahm Emanuel said just before the President took office: "You never want a serious crisis to go to waste.... What I mean by that is that it's an opportunity to do things you could not do before." Indeed.
Jay W. Richards, author of Money, Greed, and God: Why Capitalism is the Solution and not the Problem
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