The Housing Boom and Bust | Thomas Sowell

Summary of: The Housing Boom and Bust: Revised Edition
By: Thomas Sowell


Welcome to the riveting summary of ‘The Housing Boom and Bust: Revised Edition’ by Thomas Sowell! This powerful exploration dives deep into the myriad factors and players involved in the housing bubble and the subsequent economic crisis. Get ready to uncover the complex role of key institutions like Fannie Mae, Freddie Mac, the Federal Reserve, and HUD, as well as the impact of government policies on housing prices and affordability. Learn how land-use restrictions, creative financing, and political beliefs transformed homeownership in the United States and contributed to the housing boom and bust.

The Housing Bubble Burst

The housing bubble was the result of a group of actors, including Fannie Mae, Freddie Mac, the Federal Reserve, Wall Street investment houses, and affordable housing advocates, pursuing their own goals without coordination. This lack of direction led to the housing boom, bust, and the economic crisis that followed.

The Real Cause of the Housing Bubble

Equity in a home is the biggest investment for most American homeowners, accounting for 42% of their total net worth. Housing is also a significant expense for renters. However, high interest rates and down payments have always been major obstacles to homeownership. In the early 2000s, financial institutions developed risky new instruments that allowed low or no down payments. As a result, more people entered the housing market, and housing prices soared to record highs. Unfortunately, local factors drove the boom and eventually burst the housing bubble.

The housing price rises that preceded the housing market collapse were heavily concentrated in a few regions, particularly California. The explanation for this sudden jump in housing prices resides in land-use policies; the laws that California implemented in the 1970s restricting the use of land had the effect of diminishing the amount of available, buildable land. Therefore, rising demand met a shrinking supply of land in the early 2000s. Cities such as Houston that lacked zoning laws did not endure skyrocketing housing prices like California.

Moreover, governmental intervention consistently has resulted in less housing that is affordable, as seen in other developed markets like Great Britain. Curiously, affordable housing advocates prefer to use laws and policies to force the government to subsidize more low-priced housing or to compel the private sector to charge less. However, these advocates rarely attack land-use restrictions, which are the real cause of unaffordable housing.

In conclusion, the housing bubble was not evenly spread across the US but concentrated in a few regions where government policy, especially land-use restrictions, narrowed the supply of land for building homes. The affordable housing crisis can be fixed, but not by forcing the government to subsidize more low-priced housing or by mandating the private sector to charge less. Instead, advocating for the elimination of land-use restrictions can lead to an affordable housing market.

The Government’s Role in the Housing Crisis

The government’s aggressive intervention in the housing market led to the 2008 financial crisis. Both major US political parties believed that promoting home ownership was crucial, and thus policies were implemented to make homes affordable to lower-income people. However, this government pressure on banks and lenders to loosen mortgage standards had a dangerous impact. Nontraditional and subprime mortgages were given to unqualified borrowers who ultimately defaulted on their loans. The mortgage-funding institutions, Fannie Mae and Freddie Mac, were unable to sustain the high volume of risky loans, leading to a financial collapse. Despite warnings from economists, political leaders refused to acknowledge the systemic risk and continued to defend the aggressive government policies. The belief in biased lending policies made a significant political impact, but the devastating economic consequences could not be ignored.

The Housing Bubble

In the early 2000s, financial engineers created mortgage products that allowed more people to enter the housing market. Adjustable rate mortgages, interest-only mortgages, and home equity loans allowed borrowers to own equity before even making a payment towards the principal. These financial engineering tools encouraged people to buy homes and flip them with the rising market. Subprime loans became popular, especially among minority populations with no previous home-buying experience. Investors felt secure with favorable ratings from Moody’s and Standard & Poor’s. The housing bubble burst when borrowers and lenders acted irresponsibly, and the government and financial markets also contributed to the disaster.

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