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Liberalizing Cities From The Ground Up
Kevin Erdmann argues that mortgage credit standards are too tight. Others say the federal government is subsidizing homeownership. Can they both be right?
If you type “housing crisis” into Google search, “2008” is no longer the first result. The subprime mortgage crisis that toppled the global economy just a decade ago has been supplanted on Google trends by “housing crisis 2018.” This time, the crisis isn’t an overabundance of housing; it’s a chronic housing shortage. But economist Kevin Erdmann argues that the 2018 housing crisis is just the second act of the same tragedy. With local governments issuing fewer building permits and millennials beginning to buy their first homes, millions of Americans struggle to find affordable housing in 2018. The crisis is arguably the worst in California, where about one-third of all city-dwellers cannot afford local rents in every city in the state, San Diego to Sacramento. Economists and policy experts that study housing largely agree that the chronic unaffordability of American housing stems from persistent shortages in the quantity of housing supplied relative to the quantity demanded. Most housing scholars agree that “not in my back yard” (NIMBY) zoning laws are to blame. In many areas, NIMBY zoning laws have prevented developers from building multifamily housing in residential areas or forced developers to adhere to mandated minimum lot sizes. What resemblance, then, does our world of NIMBY-induced housing shortages have to do with the pre-2008 world with fast-and-loose credit policies [pdf] and overbuilt McMansions? That pre-2008 world, Erdmann argues, doesn’t really exist. [pdf] The traditional loose credit story is an easy one to tell––it appeals to populist sentiments (by demonizing rich bankers) and exudes the moral weight of an anti-capitalist parable about greed and gluttony. It makes for a great movie, “The Big Short.”And, to its credit, the traditional credit story even seems to explain much of the financial bedlam of 2008. Banks and investors placed too much confidence in risky mortgage-backed assets, […]
Big news out of Washington: Fannie Mae and Freddie Mac – which many (including me) think were at the heart of the financial collapse, and currently have some stake in the vast majority of post-crash mortgages – may be getting wound down soon. This NYT is reporting that the Obama administration may be releasing three plans at the end of the week, and the preferred (!) one is to shut down the two lenders entirely. These lines also stood out to me: Representative Scott Garrett, the New Jersey Republican who is chairman of the House subcommittee that deals with housing finance, on Monday told a mortgage conference in Florida that the government should leave the mortgage business. “I believe that, if there is to be any government assistance to homeownership, it should be limited to first-time homebuyers or rental housing,” Mr. Garrett said. Note that “rental housing” isn’t “homeownership” at all. Personally I think it’s a good idea to get the government out of encouraging homeownership entirely, on the grounds that homeowners are more likely to be in the perverse position of wanting the cost of housing – a basic expense for everyone – to go up, resulting in pervasive government interventions like anti-density zoning and blowing up the housing bubble. But even beyond this indirect sprawl promotion, they have inherent anti-density biases like their refusal to fund small mixed use projects.
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 […]
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
