Posted on 08/10/2007 7:15:24 AM PDT by SirLinksalot
Amid all the hand-wringing and fingerpointing as housing markets collapse, mortgage foreclosures skyrocket, and financial markets panic, there is very little attention being paid to the fundamental economic and political decisions that led to this mess.
The growth in risky “sub-prime” mortgage loans by people buying homes they could not really afford has been a key factor in the collapse of housing markets, when the risks caught up with both borrowers and lenders.
But why were home buyers suddenly taking out so many risky loans and lenders suddenly arranging so much “creative” financing for these borrowers?
One clue is the concentration of such risky behavior in particular places and times.
Interest-only mortgages, where nothing is being paid on the principal for the first few years, enable many people to get started on buying a home with lower mortgage payments at the outset.
But of course it is only a matter of time before the mortgage payments go up and, unless their income has gone up enough in the meantime for them to be able to afford the new and higher payments, such borrowers can end up losing their homes.
Such risky mortgage loans were rare just a few years ago. As of 2002, fewer than 10 percent of the new mortgages in the United States were of this type. But, by 2006, 31 percent of all new mortgages were of this “creative” or risky type.
In the San Francisco Bay Area, 66 percent of the new mortgages were of this type.
Why this difference in times and places? Because housing prices were skyrocketing in some places and times, so that people of modest incomes had to go out on a limb to buy a house, if they expected to buy a house at all.
But why were housing prices going up so fast, in the first place? A number of studies of communities across the United States and in countries overseas turned up the same conclusion: Government restrictions on building.
While many other factors can be involved — rising incomes, population growth, construction costs — a scrutiny of the times and places where housing prices doubled, tripled, or quadrupled within a decade shows that restrictions on building have been the key.
Attractive and heady phrases like “open space,” “smart growth,” and the like have accompanied land use restrictions that made the cost of land rise in many places to the point where it greatly exceeded the cost of the homes built on the land.
In places that resisted this political rhetoric, home prices remained reasonable, despite rising incomes and population growth.
Construction costs were seldom a major factor, for there was relatively little construction in places with severe building restrictions and skyrocketing home prices.
In short, government has been the principal factor preventing the “affordable housing” that politicians talk about so much.
Politicians have also been a key factor behind pushing lenders to lend to borrowers with lower prospects of being able to repay their loans.
The Community Reinvestment Act lets politicians pressure lenders to lend to people they might not lend to otherwise — and the same politicians are quick to cry “exploitation” when the interest charged to high-risk borrowers reflects that risk.
The huge losses of sub-prime lenders, some of whom have gone bankrupt, demonstrate again the consequences of letting politicians try to micromanage the economy.
Yet with all the fingerpointing in the media and in government, seldom is a finger pointed at the politicians at local, state, and national levels who have played a key role in setting up the conditions that led to financial disasters for individual home buyers and for those who lent to them.
While financial markets are painfully adjusting and both lenders and borrowers are becoming less likely to take on so much risky “creative” financing in the future, politicians show no sign of changing.
Why should they, when they have largely escaped blame for the disasters that their policies fostered?
You don’t lend money to people who have not the means to repay the loan. They did and now they are toast......
I predict the silence of response to this article will be deafening. Alas, I have seen way too often that Republicans and Conservatives are as involved in the NIMBY (Not In My Back Yard) game as screaming liberals. Very disappointing. In this regard -- what Sowell writes about so beautifully and truthfully -- conservatives and Republicans are EXACTLY as responsible as liberals and Democrats.
Me, I'm one of the few people I know who, in spite of my gorgeous views of open space being marred by the building of more housing, and in spite of the fact that much of my childhood wonderland, worthy of national park status, is now housing tracts, will NOT complain because to do so would be hypocritical.
The POINT here, Mr. Badger, is that those fancy risky loans woudln’t have been in demand if the housing prices were not distorted and bloated because of all the no-growth and NIMBY crap. That’s the truth. You’re confusing the symptom for the cause. Thomas Sowell knows the difference. He’s right.
I think Sowell is asking a different question. Given that people want to be able to own their own homes, why are homes in a lot of areas where these subprime woes are the hardest NOT FINDING homes that meet their budget, leaving them to take very strong risks ?
The answer based on this article is this -— NO ONE WANTS TO BUILD NEW HOMES IN THESE AREAS.
The next question is why do no one want to build new homes in these areas ?
Sowell believes that it isn’t worth their time to deal with all the hassles of having to negotiate through all the bureacucracy and red tape imposed by the local government whose policy it is to LIMIT the building of houses in the first place due to their advocacy of less sprawl, environmental concerns etc.
Hence, less houses build means less supply of houses, less supply of houses mean higher housing prices, higher housing prices and loser credit means more risk taking....
You get the picture.
Either way, the housing and real estate speculative orgy that IMHO was created almost entirely by the Fed dropping rates to 1% post-9/11. It was the right thing to do to liquefy the economy after 9/11 but it not only went on for far too long, Wall St was allowed and encouraged to create and lever up more and more exotic lending products in order to satisfy a huge demand for yield in that Fed-rate-below-natural-rate-of-inflation environment. I blame it on Greenspan, that's my story and I'm sticking to it. Wall Street was greedy (which is their job) homeowners were greedy, funding sources were greedy, and everyone lied about the fundamentals underlying either the crap they were selling or their ability to service staggering debt. Traditional and longstanding ratios of debt to income and home price to rents were discarded. Now the rubber bands are snapping back to reality in the same way that NAS 5K couldn't be sustained after the last sucker got hosed.
What about a 200K house that has a 6K property tax bill? That works out to 500 per month in property taxes. How much P and I can someone afford after that property tax bill? (This is my own house example.)
To give a loan to an “underprivileged” person in the name of “affordable” or “equitable” housing in the name of some greater good, is wrongheaded, fiscally irresponsible, and now we reap what we have sown.
Lowering standards, whether economically, educationally, etc.. to meet a certain desired outcome is damaging and anti-American. Political correctness is killing the American dream.
They should not be able to dictate that other property owners cannot develop the land in the same way their property has been developed.
What they are doing is taking control over other people's property, and they are not even providing any compensation which makes it even worse than eminent domain tactics.
I agree that the NIMBY and Anti-sprawl crowd has had a detrimental effect, as have zoning restrictions and environmental laws. But all that and other marketplace variables included, the fault, at least in my humble opinion, lies with the lender who made these high risk loans. They took the risk, and now that it’s gone south, they cannot claim innocence in the deal. If the borrower defaults, for whatever reasons, all they lose is a property, and it’s back to renting. The lender gets the property, to be sure, but until it’s sold (usually at a loss) they have no income from that property. A huge rash of these properties on the market exacerbates the problem and drives down the prices eventually. It will all work out after a while, the waves will calm, and the cycle will start over again..........
Interest-only loans and other creative financing fuel the price spiral, which always comes to an end. Sort of like low interest tuition loans and grants just enable colleges to raise their prices. Government paid medical care causes medical prices to rise. You can’t avoid market forces forever.
“What about a 200K house that has a 6K property tax bill?”
You need to move. ;>)
To another state.
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