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The Housing Boom and Bust
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This is a plain-English explanation of how we got into the current economic disaster that developed out of the economics and politics of the housing boom and bust. The “creative” financing of home mortgages and the even more “creative” marketing of financial securities based on American mortgages to countries around the world, are part of the story of how a financial house of cards was built up—and then suddenly collapsed.

The politics behind all this is another story full of strange twists. No punches are pulled when discussing politicians of either party, the financial dangers they created, or the distractions they created later to escape their own responsibility for what happened when the financial house of cards in the financial markets collapsed.

What to do, now that we are in the midst of an economic disaster, is yet another story—one whose ending we do not yet know, but one whose outlines and implications are explored to reveal some surprising and sobering lessons.

Customer Reviews:

  • A careful apportionment of responsibility for the severity of the housing crisis.
    Dr. Sowell carefully lays out the many errors that led to the normal boom and bust of the housing market becoming a massive problem that threatened the stability of our entire financial system.

    A housing slowdown after vigorous growth is normal, but it grew to something out of the ordinary because of a critical amplifying factor. That amplifying factor ties to an assumption (in both parties) that the government can have a beneficial effect in encouraging "affordable housing."

    "Affordable housing" led to the government forming the GSEs (Fannie Mae and Freddie Mac) and the abnormally low reserves they were permitted to maintain. Many folks at the Fed and in the administration warned that these organizations needed careful regulation, but were ignored by Congress. Few knew the speed or severity of the ultimate crisis.

    "Affordable housing" led to the Community Reinvestment Act of 1977 and it's further use in the 90s and 00s to weaken lending standards in the strenuous pursuit of more home ownership. It was not lack of regulation that permitted the crisis, but the wrong type of regulation that stimulated an abandonment of time-tested standards for lending. Much less regulation but of a more appropriate kind almost certainly would have prevented the crisis.

    Dr. Sowell describes many of the participants including the chairmen of the House and Senate housing committees that refused to believe there was any problem until it rocked our entire financial edifice. In spite of their monumental shortsightedness, they routinely misinterpret the crisis in an attempt to dodge the blame. They are still in their positions, where the are expected to help fix the mess, and the offending legislation has still not been repealed.

    Dr. Sowell's prose is very clear and he provides many examples that show the housing crisis was specific to certain areas, and become a burden to the nation's financial system only because institutions were encouraged to abandon traditional lending safeguards.

    There is plenty of blame to go around, and Dr. Sowell apportions it more carefully than I can in a short review. If you want to understand the housing crisis, you must read this book.
    ...more info
  • Previous government intervention begat current government intervention
    Finally! An excellent case set forth in clear, precise language for the solutions to our current economic crisis provided by free market initiatives rather than benevolent government intervention. Well-argued that the answer is not more of the same policies. Thank you!...more info
  • Excellent, Excellent, Excellent, Excellent -
    The current housing and economic crises are fertile grounds for slanted and one-sided accounts. Sowell's "The Housing Boom and Bust" has none of that - it's an honest accounting of how we all participated. Lenders, government entities Fannie Mae and Freddie Mac, builders, local government regulations, local homeowners, government regulators (HUD and bank authorities), the Congress, and presidents each played a part. Both parties were involved, though the Democrats involved outnumber the Republicans.

    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....more info
  • Brilliant yet down-to-earth
    Sowell is a brilliant and accomplished economist, yet writes in a charmingly enjoyable and accessible style. He pulls no punches politically as he explains the causes and dangers of the "housing boom and bust."

    Read this book if you want to understand how economics works (or his many other economics books). This particular book helps make sense of very recent issues. I hope every citizen and elected official reads this book. If we all did, we might just avoid these kinds of serious financial crises in the future....more info
  • The doctor does it again
    I'm a big fan of Dr Sowell, read his other books and articles. This book explains the actions of politicians of both parties that has led to the curent problem. Agree with other reviewers that this book is designed for the lay person. Would make a good read in high school economic and social science classes. For an even better understanding of the history and failures of government intervention I recommend "How Capitalism Saved America", published in 2004. Great companion book because those authors could see it coming and with their knowledge of history knew just government would react (does not matter which party)....more info
  • Sowell Nails it Again
    This book debunks the idea that the housing boom and bust are the result of the "free market" failing. Sowell explores various ways that government policy created incentives for people to behave in ways which contributed to the crash. For example, the creation of Fannie and Freddie lead to more loans being made available at riskier terms than would have taken place in a free market. The Community Reinvestment Act, HUD, and other government programs and policies sought to expand home ownership to more and more of the population. Land use restrictions and environmental policy drove up home prices in many major cities, contributing to the need for nonconventional means of financing home purchases. As usual, Sowell does a fantastic job analyzing government policies not just on their stated goals, but by looking at the long term unintended consequences they produce in the country as a whole. This book is definitely worth a read to better understand the economic mess we are in. ...more info
  • An Apology for the Banks
    This is a short book for good reason - it covers only half of the story. Sowell's main theme is that politicians established incentives that forced the banks to lend to unqualified buyers. It is the politicians and those buyers, who are painted as either foolish or speculative, who should now pay the price.

    Missing from the book is any serious mention of the role banks played in this crisis. The Commodity Futures Modernization Act and the overturn of Glass-Steagall are not mentioned. The fact that these two laws, along with a pattern of Fed bailouts of financial institutions, turned lending on its head is never brought up. The fact that large financial institutions became more concerned with the ability to generate profits from fees and securitization revenues at the expense of disregarding default risk is absent from discussion.

    The book does do a good job of exposing the role of politicians such as Barney Frank and Chris Dodd, who did much to promulgate a convoluted idea of "affordable housing." That perspective is worth reading. However, that perspective is then contorted to become essentially an apology for the role of banking in this crisis. It paints Wall Street and securitization as the innocent victims of policies forced upon them by Washington.

    To illustrate my points, I would like to quote two lines from the book.

    First, on page 67:
    "In the case of the housing market collapse, much has been made of the claim that there was inadequate regulatory agency oversight of the financial markets that turned home mortgages into esoteric Wall Street securities, which added to the risk. But these securities would have remained secure if people had continued to make their monthly mortgage payments."
    This must be the same thought the first of the Three Little Pigs had when his house of straw came crashing down - if only that wolf hadn't blown so hard.

    Second, from page 95:
    "One of the driving forces behind the strong pressures brought to bear against financial institutions, to lend to people they were not lending to as often as to others, has been a widespread belief that lenders' existing standards and practices discriminated against non-white applicants for mortgage loans, whether intentionally or systemically."
    Much of the legislation the author speaks of, like the Community Reinvestment Act, pre-dated the housing boom by many years. Barry Ritholz illustrates this quite convincingly in his book, "Bailout Nation." It was when banks developed wholesale disregard for a borrower's ability to repay, thinking that they could repackage this default risk and sell it off at enormous profit in the form of RMBS' and CDO's, that the situation leading to today's crisis really took root.

    One leaves the book wondering whether Professor Sowell received a stipend from the ABA for its authorship.
    ...more info