The terms “credit crisis” and “housing bust” will be forever stamped upon our generation. Many ordinary and not-so-ordinary people are suffering, and there’s a growing public discontent for the way things have been done. Some are calling for the dissolution of Capitalism in America, declaring that we finally have proof of the failings of free enterprise! The truth is quite to the contrary. This financial meltdown was largely caused and absolutely perpetuited by a series of government incursions into the economy!
Government incursion comes in three forms here: municipal and state regulators, federal lawmakers, and the Federal Reserve. The first is most pervasive and the primary reason we’ve seen such extreme variances in local market growth rates. There’s a reason why Santa Barbara housing price growth rates far outstripped that of Houston, despite higher population and standard of living growth rates in the former. The magic behind the mystery comes from far more severe land use restrictions in coastal California than in Texas. Developers are restricted from adding new supply in Santa Barbara, but are free to do so in Houston to match growth in demand.
In an effort to increase homeownership amongst low-income demographics (i.e. people who cannot afford homes), the Department of Housing and Urban Development (HUD) pushed the mortgage institutions to increase the number of subprime loans in their portfolios. This was social engineering at its finest, with the results now evident. The Environmental Protection Agency is another regulator itching to enter real estate by connecting climate policy to land use regulation.
The other big player in the real estate boom was the Federal Reserve and its manipulation of the money supply. In response to a stock market crash and potential economic slowdown following the attacks of 9/11, then Federal Reserve Chairman Alan Greensplan dropped the federal funds interest rate to near zero. It almost certainly dipped into negative real interest rate territory (deduct inflation from the nominal rate), which discourages saving and signals to the market to borrow. There is no question that what ensued during the heigh of excess in the real estate boom would not have occurred had the capital not been made so easily available.
Understanding how regulations, federal fiscal and monetary policy affect housing prices can help you protect yourself in the future and perhaps play the speculative game in your favor. At the very least this illustrates that there is more going on in the background than is typically discussed when people scream for new regulation. Compounding one set of new regulations on top of another causes more confusion than alleviation of our growing number of problems.
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