Customer Reviews

The Housing Boom and Bust

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The current housing and economic crises are fertile grounds for slanted and one-sided accounts. Sowell's "The Housing Boom and Bust" has none of that - it's an honest accounting of how we all participated. Lenders, government entities Fannie Mae and Freddie Mac, builders, local government regulations, local homeowners, government regulators (HUD and bank authorities), the Congress, and presidents each played a part. Both parties were involved, though the Democrats involved outnumber the Republicans.

Sowell begins with an accounting of how housing prices across the U.S. diverged from their relatively low prices of the early 1970s, especially along the California coast. The "standard" for housing expenditures used to be about 25% of gross income - this recently grew to as high as 60% in some areas (eg. Salinas, California).

Sowell contends that a major cause for California's rapid rise, beginning in the 1970s, was land restrictions that set aside areas for "open space," "protecting the environment," "historical preservation," etc. (The population increase during that period was almost equal to the national increase rate.) He cites an international study of urban areas around the world that found 23 of 26 areas with the highest land-price increases had strong "smart-growth" policies. Minimum lot-size laws also raise land costs of building a house - here, he points to Houston (incomes rose faster there than in the nation overall, but also lacks zoning laws) and a Coldwell Banker estimate that homes there costing $155,000 would cost over $1 million in San Jose.

Sowell goes on to point out that first-time buyers are limited in their ability to provide a large down-payment - averaging less than $30,000, vs. over $100,000 for repeat buyers. Meanwhile, housing prices began to escalate (the extreme was probably March, 2005 in San Mateo County where they rose $2,000/day), and houses moved rapidly (median time a home was on the MLS in California was less than 2 weeks in 2004, and just over that in 2005).

But, I'm getting ahead of things. Prior to the rapid escalation of home prices, federal bank regulators began using the 1977 Community Reinvestment Act (CRA) to press for racial equality. The issue was the statistical difference in approval rates, not a claim that most blacks could not get mortgage loans. New regulations required that the banks not just look for qualified buyers, but make a requisite number of loans to low and moderate income buyers (quotas). Then, when legislation was proposed in 1999 to permit banks to diversify into selling investment securities, the Clinton White House urged "banks given unsatisfactory ratings under the CRA be prohibited from enjoying the new diversification privileges." The Congress happily obliged. Another factor was HUD's beginning legal action in 1993 against mortgage bankers that declined a higher percentage of minority applicants. HUD also set a 42% target for Freddie Mac and Fannie Mae (FM & FM) to buy mortgages for people whose income were less than an area's median. Banks, sensing that FM & FM were implicitly guaranteed, where only too happy to not only issue these mortgages, but to buy FM & FM debt as well. (In 2003, about 3,000 banks held FM & FM debt for 100% of their capital requirements.) The "icing" was FM & FM's creative accounting that misclassified $11 trillion of sub-prime assets. Then in 2002, Bush II urged Congress to pass the American Dream Down Payment Act, subsidizing down payments of prospective buyers with incomes below a certain level.

Sowell has now set the stage, and readers have no problem understanding what happened. Interest-only teaser rate ARMs rose to counter rising prices and down-payments. By 2005, interest-only mortgages had risen to 31% of all new mortgages, up from less than 10% in 2002. In Denver, Seattle, and Phoenix it was 40%, and 66% in the S.F. Bay area. Speculators jumped into the fray (28% in 2005, 22% in 2006) adding further fuel to the fire, and happy homeowners took out $1.13 trillion in home equity loans in 2007. However, the storm on the horizon was the rise of interest rates to avoid inflation (1% in 2004, to 5.25% in 2006), making monthly payments more expensive and reducing the demand and prices for housing, and everyone takes a loss - including the banks (about $40,000 per foreclosed house), and especially speculators, minorities, and those with ARMs and interest-only loans. (Interesting Note: As of October, 2008, 7% of Bank of America's mortgages were CRA lendings, and 24% of its defaults.) Bailing out FM & FM, with their sub-prime laden inventories, cost the government more than that for all the private banks put together.

Sowell also has no problems believing that many sub-prime loans were foisted upon unaware and uninformed buyers by predatory lenders - especially involving contracts for repairs or remodeling on credit.

Bottom Line: The law of unintended consequences strikes again - helping minorities was a good intention, but backfired. We're all to blame, though admittedly some more than others. Deregulation was not the problem, rather misguided regulation. Further, the economy is not likely to reach former levels for a LONG time, lacking the frenzy the rapidly rising home prices brought to consumer buying.

A must read to all of us who are interested in the housing boom and bust, which led to the current financial crisis. Thomas Sowell is not taking side in this book, but rather presenting the facts, the cast of characters, and the policies made that had contributed to the collapse of the housing prices and financial institutions. This book contains large quantity of data, which Dr. Sowell had eloquently presented to a lay-person like me. After reading this book, I cannot help but imagine the consequences that would entail if similar cast of characters and policies were to be made on the nation's health care. This book should go hand in hand with Dr. Sowell's "thinking beyond stage one" message presented in his "Applied Economics" book. It is time to get ourselves educated and refute the rhetoric from the media and politicians who are only interested in getting elected into office.

Money, Greed, and God: Why Capitalism Is the Solution and Not the Problem

Thomas Sowell has done it again. Using his inimitable clarity, he analyzes just went wrong with the housing market, and how it contributed to a cascading, international financial crisis. The short answer? Government attempts to "create affordable housing" for lower income Americans. Who could oppose that goal? Unfortunately, the goal bore no relation to the actual consequences of the policies. A series of decisions over a number of years led to a degrading of eligibility standards on mortgages. This not only created a housing bubble. It filled the financial system with extremely risky, and unsustainable, financing schemes that would never have existed if the federal government had not attempted to manipulate the market in the first place.

The book is remarkably timely. Sowell applies his analysis to the current "stimulus" plan, and suggests that the Obama administration is using the crisis "to fundamentally and enduringly change the institutions of American society." Sound harsh? Here's what President Obama's chief of staff Rahm Emanuel said just before the President took office: "You never want a serious crisis to go to waste.... What I mean by that is that it's an opportunity to do things you could not do before." Indeed.

Jay W. Richards, author of Money, Greed, and God: Why Capitalism is the Solution and not the Problem

This superb analysis of the causes of the current financial crisis should be required reading for every American who considers himself well informed. In a straightforward style, economist Sowell lays out step by step how we find ourselves in today's economic collapse including, governmental restrictive land use policies which led to skyrocketing prices for houses in certain select areas of the country, political pressure on banks to lend to those who could not normally qualify for mortgages, the press for 'creative' financing in order to ensure a policy of affordable housing for all, real estate speculation, 'creative' accounting practices and the failure of credit rating agencies to assess the risk of subprime backed securities.

The frightening part is that those in government who put the practices into place that led to the economy collapsing like a house of cards are still in power and running things in Congress, and the new administration sees the crisis as an excuse to implement policies that will have far reaching effects on the future of this country.

If there is one flaw in the book I would have liked Sowell to go into detail about the use of subprime backed securities that caused toxic assests to infiltrate every aspect of our economy and the economy of the world.

This book debunks the idea that the housing boom and bust are the result of the "free market" failing. Sowell explores various ways that government policy created incentives for people to behave in ways which contributed to the crash. For example, the creation of Fannie and Freddie lead to more loans being made available at riskier terms than would have taken place in a free market. The Community Reinvestment Act, HUD, and other government programs and policies sought to expand home ownership to more and more of the population. Land use restrictions and environmental policy drove up home prices in many major cities, contributing to the need for nonconventional means of financing home purchases. As usual, Sowell does a fantastic job analyzing government policies not just on their stated goals, but by looking at the long term unintended consequences they produce in the country as a whole. This book is definitely worth a read to better understand the economic mess we are in.

The television and print media would like you to believe that the Housing Crisis is a fabrication of greedy Wall Street charlatans creating esoteric financial instruments such as mortgage backed securities. And that more regulation is the needed remedy.

Thomas Sowell argues that those mortgaged backed securities would have remained secure had pressure groups and politicans not coerced banks into lending to previously unqualified borrowers. Additionally, banks were encouraged to make risky loans by the guarantee that loans made to low income groups would be purchased by Government Sponsored Enterprises, Fannie Mae and Freddie Mac. So, the seeds of the housing bust were sown in 1990s with Affirmative Action in Lending policies.

Sowell makes a comprehensive and convincing argument for his case. He backs up his work with an extensive bibliography in the back. The book is short and concise and can be read in 3-4 hours.

I am encouraging my friends to read this book if they want to understand the origins of our current economic problems.

Thomas Sowell highlights the damage caused to the housing sector due to race guilt. Well meaning and opportunist Democratic Party politicians literally demanded that lenders provide mortgages to minorities possessing poor credit histories. Those who even hesitated to go along with this madness were often branded as racists and severely harmed by left-wing government regulators. The free market argues the author did not dictate policies. No, they were instead set by out of control politicians like Barney Frank and untouchable bureaucrats. Democrats deserve most of the blame. It was the Jimmy Carter administration, after all, in 1977 that started the innocuous sounding but highly destructive Community Reinvestment Act. Nonetheless, a number of Republicans also deserve to be criticized. The politically correct George W. Bush substantially added to the problem.

Professor Sowell also helps to increase our understanding of the Great Depression. Franklin D. Roosevelt was essentially Herbert Hoover on steroids. Both men strongly believed in government interference in the marketplace. FDR's New Deal policies, however, dramatically worsened an already bad situation. The Housing Boom And Bust is relatively short---and to the point. This is perhaps the best work available to help the typical American to better understand the immediate threat to our financial future. Trust me, you want to purchase a copy. It contains much of the intellectual ammunition required to combat those pushing our economy to the breaking point.

I'm a big fan of Dr Sowell, read his other books and articles. This book explains the actions of politicians of both parties that has led to the curent problem. Agree with other reviewers that this book is designed for the lay person. Would make a good read in high school economic and social science classes. For an even better understanding of the history and failures of government intervention I recommend "How Capitalism Saved America", published in 2004. Great companion book because those authors could see it coming and with their knowledge of history knew just government would react (does not matter which party).

The first half of Housing Boom and Bust is like the housing market in the first half of this decade--seemingly endless potential. While I disagree politically with some of what Sowell believes, he is a clear-thinking, thoughtful writer. His book "Basic Economics" is a five-star work. He has the ability to lucidly explain arcane subjects without talking down to readers.

But this book only begins to tell the story of the housing bust and ensuing financial crisis. It's the equivalent of watching a football game and the t.v. station only shows you the first half. It was a great two quarters, but I want to see the rest of the game.

This book does an excellent job of explaining the political origins of this crisis. The main thrust of Sowell's argument is that government action usually leads to the opposite of intended consequences. The mantra of "affordable housing" led to government interference into banking which weakened standards of due diligence for home buyers. The government's most significant act was the pressure put on Fannie Mae and Freddie Mac to buy mortgages from lenders who had lowered their standards in the pursuit of providing "affordable housing." Only banks that played along in the late 90s were allowed to offer more exotic securities, and thus increase their potential for profit.

What isn't here is the extent to which lenders and investors took every advantage of this system, flooding the market with new investment tools that didn't hold up to the light of day (mostly due to the unsoundness of many of the mortgages that provided their foundation). Just like any other market or opportunity that is offering unusually high rewards, huge numbers of lenders and investors were drawn to mortgage-backed securities at the beginning of this decade. It was the dangerous extent to which major creditors were heavily leveraged with these securities and their by-products, such as credit default swaps, that has led to the severity of this crisis.

Even Sowell explains that rotten mortgages weren't enough to create this recession: "Unlike the bailouts of financial institutions, where the argument could be made that the shrinkage of credit if these institutions collapsed would hurt the whole economy, no such claim could be made for preventing mortgage foreclosures (78)."

I recommend this book for Sowell's explication of the politics behind "affordable housing" and the damage this continues to do to our economy. For politicians, the conflict between getting reelected and serving the American public has time and again come down on the side of the former, with horrible consequences for this country.

However, the reader would do well to find other sources to tell the rest of the story.

President John Adams once said "The truth can be painful" and that is the case for today's situation.

Thomas Sowell not only educates you in plain English about how we got into this mess through government intervention into the housing market, but he also talks about why politicians do what they do. He also includes a great chapter on the past and the future of where this kind of domestic/economic policy is going and has been. He gives an overview of the Great Depression and a basic understanding of what happens when government intervenes into the economy.

I hope Dr. Sowell continues to live long and produce a book a year. Those fighting for common sense cannot take a break just yet.