The Housing Boom and Bust

I just finished reading the book “The Housing Boom And Bust” by Thomas Stowell. Based on his background I would consider him an authority on the matter. It was quite an interesting read that explains what the root causes were to the economic melt-down we had, which was led by the sub-prime mortgage crisis. The book was published this year so it is probably the most current published writing on the matter. Here is a quote from one of the last pages of the book that puts things into real perspective.

p.146 “Lenders did not spontaneously begin to lend to people who would have qualified for loans under the traditional criteria that had evolved out of years of experience in the market. Such risky loans were made under growing pressures from government regulatory agencies and politicians, and even threats of prosecution from the Justice Department if the statistical profiles of borrowers whose loan applications were approved did not match the government’s preconceptions. The growth in subprime loans was one way of meeting arbitrary quotas for lending to people who did not meet the criteria for loan approval that had prevailed for years. Quota lending was on of many political “solutions.” Often these interventions have focused on some limited goal, with no real concern about, or even awareness of, the wider ramifications of what they were doing….
…Nor is it likely that the national politicians of our own times, who for years made “home ownership” the touchstone of housing policy, will acknowledge any responsibility of the financial disasters and widespread unemployment today.”

What were the root causes of the housing crisis?
Government is the conclusion.
-Government policies restricting land use and development in states like California which in turn drove the housing prices up to their stratospheric levels. Reduce the supply and prices go up.
-Government policies pressuring banks to change their underwriting criteria to extend loans to borrowers that were not credit worthy. Kind of a “no pay, no play policy”
-Fannie Mae and Freddie Mac (government sponsored entities) changing their criteria to be able to buy the loans of lower underwriting criteria.
-Interest Rates being kept artificially low by the Federal Reserve Bank making it possible for people to afford homes that are more expensive. People made the trade-off of buying higher priced homes because low interest rates made it possible.

I like this book for many reasons but primarily because it pins the blame for the problems squarely where it belongs….on the shoulders of our government. Which through its policies forced the US economy onto a very week foundation that was just about guaranteed to collapse.