Blame for the Bubble
By now, you're probably sick of reading all the competing theories about who and what created the housing bubble of 2003 to 2006 and subsequent bust. You just want the long national decline in home prices to bottom out (which I believe will happen early next year).
But in the meantime, I suggest you grit your teeth and endure a few hours of education from a master explainer of economics: Thomas Sowell, who toils at the Hoover Institution at Stanford University. His new book, The Housing Boom and Bust, lays it all out with chilling clarity, in just 148 very lucid pages. (A personal disclaimer: A young Professor Sowell taught me economics at Cornell in 1966, before he became a celebrated author, and I have admired him ever since.)
For such a blandly titled tome, Sowell's book is a provocative manifesto of libertarian economics, and its scope is far broader than just the housing crisis. You'll read, for example, his take on the New Deal (which he believes prolonged the Great Depression) and the role of low-density zoning and open-space preservation in making housing needlessly expensive in elite locales.
In his final chapter, the professor argues that allowing market forces to work—however brutal the short-term impact—will bring a quicker and longer economic recovery than governmental remedies that will create massive federal budget deficits for years to come.
A Risky Crusade
The seeds of the current financial crisis were sown in the late 1990s, Sowell argues, when politicians in Washington [of both parties, but more Democrats] set out to solve a national problem that did not exist—a nationwide shortage of "affordable housing." He notes that "the share of their incomes that Americans were spending on housing in 1998 was 17%, compared with 30% in the early 1980s; even during the housing boom of 2005, the median home took just 22% of the median American income." What "created the illusion of a nationwide problem," he writes, were soaring home prices in a relatively few metro areas, mostly near the Pacific and Atlantic coasts.
Despite a fairly normal national situation regarding the affordability of housing, Washington, egged on by the home-building and real estate lobbies as well as Wall Street, embarked on a well-intentioned but risky crusade to make homeownership easier for people who really couldn't afford it.
Leading the charge, he demonstrates with copious citations, were Rep. Barney Frank (D.-Mass.) and Sen. Christopher Dodd (D.-Conn.), who chair financial-serv-ices committees. Sowell details how congressional pressure on mortgage financiers Fannie Mae, Freddie Mac and the nation's banks gave birth to subprime adjustable-rate mortgages with no money down, low teaser rates, no documentation of the borrower's income and assets, and interest-only monthly payments.
Warnings from a few government watchdogs, economists and bankers were brushed aside. When the mortgages were bundled as securities, given a bogus gold seal by credit-rating agencies and sold to investors around the world, America's housing crisis went global.
We've heard all the elements of this story before, but rarely with the coherence and detail of Sowell's telling.
Today, soaring foreclosures and falling prices have made homeownership more affordable for first-time buyers virtually everywhere, even in once-sizzling markets, if they can qualify for a plain-vanilla mortgage according to traditional lending standards.
Even after falling prices stabilize and turn up, I believe this relative affordability will continue for some time if Washington can resist the urge to fix past mistakes with new remedies that will make matters worse. But that's a big if, indeed.
Columnist Knight Kiplinger is editor in chief of Kiplinger's Personal Finance, The Kiplinger Letter and Kiplinger.com.