The Texas 18th District Blog

If you want an excellent, in depth explanation of what caused the housing bust that led to our country’s recent recession, I’d highly recommend Thomas Sowell’s The Housing Boom and Bust. It’s easy to understand, packed with great research, and features Sowell’s clear no-nonsense writing style. Here are the quotes that caught my eye from the book:

The record breaking housing price rises that preceded the record-breaking housing market collapse were not evenly spread across the United States but were heavily concentrated in a relatively few places. — P.2

More than two-thirds of the mortgages in 2004, for example, were resold to some other financial institution, including Fannie Mae and Freddie Mac. These two government-sponsored enterprises bought more than one-third of all the mortgages in the nation that were resold by the original lenders. P.3

The interest rate on a conventional 30-year mortgage was about 8 percent in 1973, 18 percent in 1981, and 6 percent in 2005. — P.6

An international study of urban areas around the world with “severely unaffordable” housing likewise found that 23 out of 26 such areas had strong “smart growth” policies. …As a former governor of the Reserve Bank of New Zealand put it, “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. — P.13

A study of housing prices across the nation concluded:

Today, a family in an American city without growth management planning can buy a very nice “middle manager’s” home with about 2,200 square feet, four bedrooms, two-and-one-half baths, and a two-car garage, for $150,000 to $200,000. In cities than have had growth-management planning for ten to fifteen years, that same home costs $300,000 to $400,000. In cities that have had it for twenty-five years or more, the same house costs from $500,000 to as much as $1.5 million. — P.14-15

In 2002, less than 10 percent of new mortgages in the United States were interest-only mortgages, but that rose to 31 percent by 2005, as home prices rose. In a number of California cities, as well as in Denver, Washington, Phoenix and Seattle, interest-only loans were 40 percent of all mortgage loans made in 2005. In the San Francisco Bay Area, interest-only loans rose from being 11 percent of all new mortgages in 2002 to becoming 66 percent of all new mortgages in 2005, the height of the housing boom, in an area with some of the most expensive real estate in the country. — P.20-21

A special variation on the home equity loan was what was called “cash out refinancing.” Someone owing $300,000 on a mortgage with a fixed interest rate of 8 percent could take out a new loan to replace the old loan when the interest rate fell to 6 percent. But instead of taking out another $300,000 mortgage loan at 6 percent, the homeowner could take out a $400,000 mortgage loan at 6 percent, paying off the existing loan from the proceeds of the new loan and keeping a $100,000 in cash. …These kinds of home equity loans increased more than ten-fold during the housing boom, rising from $26 billion in 2000 to $318 billion in 2006. As of 2006, 86 percent of all home mortgage refinances were “cash-out” refinances. — P.23

Given all the ways of tapping the equity in a home to take out hard cash, it should not be surprising that the average equity in a home, which was 86 percent of its value back in 1945, was just 55 percent of its value in 2003. — P.23

Nationwide, a survey by the National Association of Realtors found that, during the housing boom, homes were bought as investments, rather to live in, by 28 percent of home buyers in 2005 and by 22 percent of home buyers in 2006. — P.27

For the country as a whole, however, home buyers have paid no more than the old fashioned standard of 25 percent of their incomes for housing in any year since 1985. Renters in recent years paid a somewhat higher percentage of their smaller incomes but not more than 20 percent in any year over the past several decades. Neither by comparison with the recent past not by comparison with other countries today is most housing in the United States unaffordable. The median-priced home in the United States as a whole is 3.6 times the median income of Americans. For Great Britain, the median-priced home is 5.5 times the median income and, in Australia and New Zealand, the ratio of home prices to income is 6.3 — P.33-34

Advocates of “affordable housing” seldom — if ever — seek to remove government restrictions that have led to higher housing prices. Instead, they seek various ways of either forcing the private sector to charge lower home prices and apartment rents, or else they seek to use the taxpayers’ money to subsidize housing in one way or another. — P.35

In 2002, the George W. Bush administration urged Congress to pass the American Dream Downpayment Act, which subsidized the down payments of prospective home buyers whose incomes were below a certain level. After passage of that Act, the president also urged Congress to pass legislation permitting the Federal Housing Administration to being making zero-down-payment loans at low interest rates to low-income Americans. In 2004, Federal Housing Commissioner John Weicher said, “the White House doesn’t think those who can afford the monthly payment but have been unable to save for a down payment should be deprived from owning a home.” He added, “We do not anticipate any costs to taxpayers.” Who, if not the taxpayers, would pay for these government subsides — much less the defaults from riskier loans — was not revealed. — P.41-42

Traditional 30 year mortgages with a fixed interest rate, which were still 57 percent of all mortgages in 2001, fell to 33 percent of all mortgages by the end of 2006. Meanwhile, subprime loans rose from 7 percent of all mortgage loans to become 19 percent of such loans over the same span of years. Other non-traditional loans rose from less than 3 percent of all mortgage loans to nearly 14 percent. — P.42

As far away as London, the distinguished British magazine The Economist in 2003 reiterated a warning it had made before, that “house prices would fall by 10% in America over the next four years,” though it acknowledged that many of its readers “reject our gloomy warnings.” In reality, American house prices fell sooner and more steeply. By 2005, The Economist repeated their warnings yet again, but more urgently: “America’s house prices have reached dangerous levels” and added: “The whole world economy is at risk.” In 2003, U.S. Secretary of the Treasury John W. Snow asked Congress to “enact legislation to create a new Federal agency to regulate and supervise” Fannie Mae and Freddie Mac, because of his concerns about the risks they were taking. Two years later, testifying before the same Congressional committee, he returned to the same theme, citing the “systematic risk”… p.45

A 2004 article in Fortune magazine also warned of housing speculation that “is rapidly losing touch with reality” and of the risks created by the growing practice of borrowing against the equity of one’s home. It warned that “there’s a real danger that a downturn in prices, or even a stall, could slam the economy, especially all-important consumer spending. Americans have used their homes like ATMs, taking out $662 billion in home-equity loans and refinancings since 2001.” — P.46

In 2005, resident scholar Peter J. Wallison of the American Enterprise Institute, a Washington think tank, warned that, if Congress did not rein in Fannie Mae and Freddie Mac, “there will be a massive default with huge losses to the taxpayers and systemic effects on the economy.” — P.46

In June 2004, in response to President Bush’s expressed concerns about the riskiness of Fannie Mae and Freddie Mac, seventy-six Democrats in the House of Representatives sent him a letter defending these government-sponsored enterprises, and against making the case that “an exclusive focus on safety and soundness is likely to come, in practice, at the expense of affordable housing.” These 76 house members included such prominent individuals as Nancy Pelosi, Barney Frank, Maxine Waters and Charles Rangel. — P.51-52

Congressional support for Fannie Mae and Freddie Mac went far beyond words. When the Office of Federal Housing Enterprise Oversight — the agency overseeing these government-sponsored enterprises — turned up irregularities in Fannie Mae’s accounting and in 2004 issued what Barron’s magazine called “a blistering 211-page report,” Republican Senator Kit Bond called for an investigation of the Office of Federal Housing Enterprise Oversight, tried to have their budget slashed, and sought to have the leadership of the regulatory agency removed. Democratic Congressman Barney Frank likewise declared: “It is clear that a leadership change at OFHEO is overdue.” — P.53

The development of lax lending standards, both by banks and by Fannie Mae and Freddie Mac standing behind the banks, came not from a lack of government regulation and oversight, but precisely as a result of government regulation and oversight, directed toward the politically popular goal of more “home ownership” through “affordable housing,” especially for low-income buyers. — P.57

By 2007, about one-fourth of all adjustable rate mortgage loans, interest only loans and payment option loans were at least 60 days late on their mortgage payments. This was more than double the rate of payment delinquencies on conventional 30-year fixed-rate mortgages. — P.63

Like other aspects of the housing markets, foreclosures on property owned by absentee owners were “much more common among defaults in California, Nevada, Arizona, and Florida — all states with particularly rapid price appreciation that attracted speculators.” — P.64

Holman Jenkins of the Wall Street Journal called attention to “the striking fact” that much of the subprime crisis originated in particular countries in just four states. — P.64

Mortgages made under the Community Reinvestment ACt were especially vulnerable during the housing downturn, to the detriment of both borrowers and lenders. For example, lending done under Community Reinvestment Act criteria, according to a quarterly report in October of 2008, constituted only 7 percent of the total mortgage lending by the Bank of America, but constituted 29 percent of its losses on mortgages. — P.66

Professor Stanley Liebowitz of the University of Texas at Dallas put it: “From the current handwringing, you’d think that the banks came up with the idea of looser underwriting standards on their own, with regulators just asleep on the job.” Government was not passively inefficient. It was actively zealous in promoting risky mortgage lending practices. — P.68

Senator Christopher Dodd said: “I have a lot of questions about where the administration was over the last eight years.” Often the Bush administration had sought increased power to rein in Fannie Mae and Freddie Mac during those years, which Senator Dodd fought adamantly against granting such powers. — P.72

In the wake of the housing bust, Congressman Barney Frank and Senator Christopher Dodd, as chairmen of the House and Senate committees most involved in the housing market — and long-time promoters of the very policies that led the housing boom and bust — were all over the media, where they were treated as experts, able to explain the problems and provide solutions. — P.75

Since many people have trouble grasping what a trillion means, one way to visualize it is that a trillion seconds ago, no one on this planet could read or write. The ancient Chinese dynasties and the Roman Empire had not yet come into being. None of the founders of Christianity, Judaism, or Islam had yet been born. That was a trillion seconds ago — and we are talking about trillions of dollars. — P.82

Moreover, the process costs of fighting a discrimination charge can be enormous, whether the charge is racial discrimination or sex discrimination. The Sears department store chain, for example, spent $20 million fighting a sex discrimination case for 15 years, even though the Equal Employment Opportunity Commission that brought charges against Sears did not produce even one woman, either currently or previously employed in any of Sears’ hundreds of stores across the country, to claim that she personally had been discriminated against. — P.105

A study of housing costs, for example, found that land-use restrictions in the name of “smart-growth” policies had added costs of more than $100,000 per home in 50 metropolitan areas. In a community of just 10,000 families, that adds up to more than a billion dollars’ worth of extra housing costs loaded onto the people in such a small community, often on the basis of little more than some fashionable but unexamined phrases about “smart growth.” — P.114

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. — P.118

More generally, what is called a “solution” in politics is often simply a patch put over problems caused by previous political “solutions,” which in turn were patches put over other political “solutions” before that. — P.123

To single out home ownership or any other goal as the crusade of the day — as a “good thing” — ignores the fact that virtually nothing is a good thing categorically. — P.124

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. — P.128

During all the previous history of the United States, when the federal government let the economy recover from downturns on its own, no depression was ever as deep or as long-lasting as the Great Depression of the 1930s. — P.134

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 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. — P.148