Thomas Sowell’s Revised Edition of The Housing Boom And Bust is a meaty 250 page read for anyone who wants to understand the forces and history of the housing bubble in the early 2000s. I anticipated from Sowell’s previous book “Basic Economics” that he would be able to explain the items logically, using non-technical terms. He did not disappoint. This book was originally written in 2008, with the revised edition published in 2010 with further information that “reinforced” the conclusions in the first edition.
Sowell asserts there was a combination of economic and political factors that led to the housing crisis.
On the economic front, Sowell’s research indicated that the housing bubble was really limited to specific geographic areas in California, the East Coast, and Florida (with Las Vegas thrown in for good measure). There was a very dramatic rise in housing prices primarily due to restrictions on the uses for land imposed by political entities, seen locally in cities with “smart growth” policies that constrained the type and the size of housing people could provide on the market. In cities that allowed unrestricted development (like Houston), housing building and availability grew to meet demand without great increases in the price. Apartments, large lots, or row houses could be built to meet the demand for each at what the market would bear. This was contrasted with cities like San Francisco where “smart growth” restrictions were placed on housing. The cost to enter the housing market was very high in those places, where restrictions in the minimum lot size, how many tenants were permitted, and if you could build apartments in an area dramatically raised the cost of housing. Another factor in place such as Nevada was the lack of land available to develop – the federal government owns 90% of the land in the state, so there is very little room to expand and opportunities to build anything.
Nationally, while housing costs appeared to be rising at a very dramatic rate, these numbers were deceiving because in fact the increase in housing costs was limited to massive increases in a relative few geographic areas.
Politically, Sowell explains the boom was a logical child of policies began in 1977 as part of the Community Investment Act (CIA). The CIA formed the regulatory base work that gave
- The Federal Deposit Insurance Corporation (FDIC)
- The Federal Reserve System (the FED, what Ben Bernanke and Alan Greenspan were the Chairman of)
- The Office of the Comptroller of the Currency (I had never heard of this before)
- The Office of Thrift Supervision (really, there is a government office that does this?)
the ability to allow or deny permission for banks to make fundamental internal business decisions. I was shocked to read that the business decision to merge with another bank or open a new branch location was conditioned on the four agency’s approval. That approval was based on those office’s assessments as to whether the bank was sufficiently providing loans to “underserved populations” (racial minorities). The logic and “facts” behind the political decisions to force banks to lend more to people who were greater credit risks. The “suggestions” became “guidelines” became “requirements”. The fact that these regulatory bodies had the final approval over fundamental private business decisions also exposed the banks to extortion tactics from private organizations. ACORN is listed with specific examples of where they extorted money from banks that wanted to open new locations – donations to ACORN and guaranteed loans to people in (minority) communities regardless of credit risk. This required lending to people who were greater credit risks caused huge problems when the economy in general took a small downturn. The group of people who were just barely making their payments was so large that when that group started to default on their loans, there was no chance for the house of cards to stabilize.
Thomas Sowell provides a compelling case that the housing crisis was caused by government regulation and interference at the city/county level and at the federal level in Washington, DC. Elimination of “smart growth” rules at the local level and elimination of government “fixes” to non-existent problems at the national level will eliminate the next “housing crisis”. Let the incentives of business success and failure work!