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Talking points on the housing bubble

By Sandy Ikeda Last week I spoke to a standing-room-only crowd of students and faculty about the current economic and financial turmoil.  I shared the podium with three of my colleagues, who range all the way from far to the left of Barack Obama to very, very far to the left of Barack Obama.  Needless to say, they all blamed, to a greater or an even greater degree, “the free market.” Now, I do think it’s possible in principle for wide-spread mal-investments to occur in an unfettered market.  (F.A. Hayek writes about the possibility in his Monetary Theory and the Trade Cycle, which you can read online here.)  But enormous speculative bubbles, of the sort we’ve just witnessed in the housing market, are typically the result of government interventions and policies. So in my talk on this highly complex issue I tried to make three points:  (1) the immediate cause of the financial panic on Wall Street was the housing bubble with its sudden rise in mortgage defaults; (2) the free market, which stands for minimal government and the absence of privilege or discrimination, did not create this bubble; and (3) government (and Fed) policy and pressure did, by undermining lending standards across the board and pushing lending rates artificially low. This blog has already referenced Russell Roberts’s fine collection of blog posts on the problem, and if you’re already familiar with the issues then obviously there will be nothing new here for you.  But I think it might be useful to have a list of “names and dates” that make the above case.  The following is not meant to be exhaustive (e.g., it doesn’t even mention important international factors), but is only an outline of the major legislation and policies relevant to the housing bubble. (Caveat:  My expertise in […]

Market Meltdown and Bailout Videos

Wow! This market is a mess. As a great follow up to his posts at CafeHayek on government’s intervention in the housing market, Russell Roberts discusses the situation and bailout with reason.tv: Also… Here’s the video from an Economics forum discussion at MIT (my Alma mater) on Wednesday: The US Financial Crisis What Happened? What’s Next? And another forum at USC. [HT Richard’s Real Estate and Urban Economics Blog]

Cook County (Chicago) Sheriff Won’t Evict in Foreclosures

Cook Co. sheriff won’t evict in foreclosures from Associated Press Cook County Sheriff Tom Dart says he’s ordered his deputies to stop taking part in evictions of properties that have been foreclosed upon. Dart says the change goes into effect Thursday. He says the decision comes because many of those being evicted are people who’ve been faithfully paying rent and didn’t even know about the foreclosures. Dart says he thinks he’s the first sheriff in a major metropolitan area to stop such evictions during what’s become a major foreclosure crisis around the nation. Dart says the number of mortgage foreclosures in Cook County has skyrocketed this year and that he expects that number to climb much higher. — It’s really tragic that renters who have otherwise valid lease contracts, lose that right because of their landlords’ failure. But, I don’t have the same sympathy for the defaulters themselves. What do you think will result from this move? Will banks stop foreclosing in Chicago without the rule of law on their side? Will defaulters squat?

Glaeser: Let Housing Prices Fall

Ed Glaeser gives three compelling reasons why the government should end their infatuation with high housing prices. (Nonetheless, some of the same politicians speak through the other side of their mouths about promoting housing affordability): Why We Should Let Housing Prices Keep Falling There is a superficial attractiveness to policies that seem to promise an end to falling housing prices, but there are three reasons why these proposals don’t make much sense to me. First, the government has no business trying to make housing less affordable to ordinary Americans. There is no reason to hope that middle-class Americans should pay more for any basic commodity, whether that commodity is coffee or oil or housing. Government should be fighting to reduce supply-side barriers and make housing cheaper, not trying to inflate prices artificially. Second, most of these proposals seem likely to be expensive failures. The government just doesn’t have the tools to rewrite the laws of supply and demand. If the cost of building a home in Las Vegas is $150,000, and there are no restrictions on building, then all the credit policies or bailouts in the world aren’t going to permanently keep prices above $150,000. Finally, these policies all have the common feature of getting the government further entrenched in the operation of the housing market, and this creates all sorts of long-term market problems. I would have thought that recent events at Fannie Mae and Freddie Mac, for example, would have made Americans recognize the costs of having government-sponsored enterprises play mortgage lender to the nation. I would have hoped that the history of public housing would have made us wary about spending huge amounts of tax dollars to get into the business of public property management. The current crisis may imply a need for more federal regulation of […]

Russell Roberts on Government Intervention in Housing

Russell Roberts of George Mason University, CafeHayek, and Econtalk wrote of series of Cafe Hayek posts on the various federal interventions in the housing market: Housing markets without the benefit of hindsight Fannie reaches its goals–sort of Zero Down! Fannie and Freddie’s other mission Section 8 Bill cared too Affordable equals “subprime” Calm down And don’t forget Andrew Cuomo Shiller and fundamentals The role of the CRA It’s not the CRA No money down, revisited Bear Stearns, the CRA, and Freddie Mac Stiglitz on the crisis

Econtalk Podcast: Shiller on Housing and Bubbles

Shiller on Housing and Bubbles Robert Shiller of Yale University talks with EconTalk host Russ Roberts about the current housing mess and related financial market problems. Shiller argues that the decade-long run up in housing prices was a bubble where speculative fervor outweighed any economic fundamentals. He also discusses the genesis of the Case-Shiller housing price index and his idea for how it might be used to reduce risk in the mortgage market. Note: This podcast was recorded on September 5, 2008, days before Secretary of the Treasury Paulson put Fannie Mae and Freddie Mac into conservatorship.

Housing + Transportation Affordability Index

affordability in New York City Play with the HUD-Brookings Institution’s new index maps here: The Housing + Transportation Affordability Index, developed by CNT and its collaborative partners, the Center for Transit Oriented Development (CTOD), is an innovative tool that measures the true affordability of housing. Planners, lenders, and most consumers traditionally measure housing affordability as 30 percent or less of income. The Housing + Transportation Affordability Index, in contrast, takes into account not just the cost of housing, but also the intrinsic value of place, as quantified through transportation costs. I enjoyed playing with the maps to see the interplay of accessibility and affordability. In New York, some very accessible places are not-so affordable, such as many areas of Manhattan. Same goes for upscale parts of Chicago. At the same time, very affordable housing locations in exurbs become less affordable when considering transportation costs. I plan to spend more time investigating how they produce the index. [tip of the hat to Peter Gordon]

Glaeser: State of the City

I’m a little slow picking up on this one, but the Wall Street Journal recently interviewed Harvard Urban Economist, Ed Glaeser. Here are some excerpts from State of the City: THE WALL STREET JOURNAL: What effect will higher gasoline prices have on urban planning in the U.S.? MR. GLAESER: I would be very surprised to see a wholesale change in the nature of American urban development. We should certainly see changes in the short run, [such as] a slight decrease in demand for housing that’s particularly far away from city centers and dependent on long drives. That [type of housing] won’t be abandoned entirely, but it will certainly be cheaper. WSJ: What about the idea of having the government purchase foreclosed homes and convert them into affordable housing? Would that be good for the economy? MR. GLAESER: The government’s track record as a property owner is not so great. I am less enthusiastic about the government getting into this business. If we want strong policies towards taking care of the least well-off in our society, we should make sure supply is unfettered and continue working on the Section 8 [low-income housing] voucher program — that’s the right strategy. Glaeser discusses Chicago’s success: MR. GLAESER: I think Chicago has been remarkably successful in lots of ways. The city has managed to stay pretty affordable and Mayor [Richard] Daley has been extremely pro-growth. Chicago, for many years, has had a relatively pro-growth environment, at least relative to California and New York — especially [before current Mayor Michael Bloomberg]. The climate in Chicago is, of course, far less pleasant than San Francisco and wages are lower than New York. Still, it is somewhat remarkable that condo prices in Chicago [a median $232,000 in 2007] are less than those in Trenton, N.J. [$248,000], and […]

Glaeser on Affordability of NY vs Houston

Harvard Economist Ed Glaeser wrote an opinion piece in the New York Sun about the differences in housing affordability and other costs of living between Houston and New York. New York is naturally more expensive than Houston because the geographical constraints force higher density development, which is more expensive to build. New York’s highly regulated land use and zoning process adds more constraints that exacerbate this problem. On the flip side, Houston has few geographical constraints and relatively loose regulation, allowing the market to allocate housing more efficiently. In conclusion, Glaeser recommends that New York could do much to improve affordability by loosening it’s many regulations. NY Sun – Houston, New York Has a Problem Why is it so much more expensive in New York? For one, supplying housing in New York City costs much, much more — for a 1,500-square-foot apartment, the construction cost alone is more than $500,000. Also, part of the reason is geographic: an old port on a narrow island can’t grow outward, as Houston has, and the costs of building up — New York’s fate, especially in Manhattan — will always be higher than those of building out. And the unavoidable fact is that New York makes it harder to build housing than Chicago does — and a lot harder than Houston does. The permitting process in Manhattan is an arduous, unpredictable, multiyear odyssey involving a dizzying array of regulations, environmental, and other hosts of agencies. A further obstacle: rent control. When other municipalities dropped rent control after World War II, New York clung to it, despite the fact that artificially reduced rents discourage people from building new housing. Houston, by contrast, has always been gung ho about development. Houston’s builders have managed — better than in any other American city — to make the […]

Amateur Economist: Zoning Hurts Housing Affordability

G.L.C. at Amateur Economist wrote an informative article on zoning, an issue which always gets attention at Market Urbanism – Why Zoning Laws Are No Longer a Benefit to U.S. Home Buyers Virtually every town in the United States has zoning laws which affect land use, lot size, building heights, density, setbacks, and other aspects of property use. Zoning laws are government regulated restrictions on how a particular piece of land can be used – residential, commercial, industrial, agricultural, and recreational. They impose many use restrictions, such as the height and overall size of buildings, their proximity to one another, what percentage of the area of a building lot may contain structures, and what particular kinds of facilities must be included with certain kinds of uses. G.L.C. goes on to discuss how zoning restrictions, such as height and density restrictions, constrain the supply of housing nationwide. These supply restrictions causes prices to be higher than they would be without restriction. The article also cites data from research by Ed Glaeser and Joe Gyourko: Edward Glaeser of Harvard and Joe Gyourko of the University of Pennsylvania studied this problem and attributed the error on the supply side to zoning restrictions. They studied the data from over two dozen American cities and concluded that zoning restrictions kept the housing prices high and did not allow competitive forces to correct the supply and demand position.

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