The Housing Boom and Bust

“The Housing Boom and Bust” (Basic Books, 2009, 184 pages, $31.95, by Thomas Sowell)

“The Housing Boom and Bust” is the history of a failed government policy, the cynical

actions of community development organizations, progressive politicians, financial institutions and finally ordinary people caught up in the greed of the moment.

According to Thomas Sowell, “From 2000 to 2005, the median sales price of American single-family homes rose by one third, from $143,600 to $219,600. In New York the price rose 79 percent, in Los Angeles 110 per cent and in San Diego 127 percent.” Subprime mortgages also rose from $65 billion in 1995 to $332 billion by 2003. However, by 2008 the average home price in California dropped an average $100,000 in one year. In San Diego alone the average home price decline was $200,000 from 2006 to 2008.

The seed of the housing boom and bust was planted in 1977 when President Carter signed into law the Community Reinvestment Act. With a stroke of his pen the president gave federal officials the authority to tell banks who they could lend to. By 1990, “…Attorney General Janet Reno threatened legal action against lenders whose racial statistics raised her suspicions.”

Lending institutions took the hint and loosened traditional income and down payment requirements. By the year 2000 20% down payments were the minority of loans and subprime lending was the norm. Non-profit institutions like ACORN (Association of Community Organizations for Reform Now) pressured local lending institutions and political leaders into providing loan guarantees and financial support to community action projects.

The Housing Boom and Bust is a short (148 pages of text) readable book. I recommend it to those interested in understanding the law of unintended consequences in public policy. It would make excellent background reading for a high school civics class discussion.

My only complaint is that in the final chapter Sowell drifts off topic by traveling back in time to the causes and effects of the Great Depression. I wish he had spent more time on the housing boom and bust of 1921-1929, essentially the same manufactured crisis – lack of affordable housing, with the same results – massive foreclosures and unemployment in the 1930s.

It is indeed curious to note that in both eras the presidents were progressive and focused less on solving massive unemployment and more on reforming the republic toward a more socialist state.

Thomas Sowell is the author of 15 books and a syndicated columnist whose writings appear in 150 newspapers. Sowell received his bachelor’s degree in economics (magna cum laude) from Harvard in 1958, his master’s degree in economics from Columbia University in 1959, and his Ph.D. in economics from the University of Chicago in 1968.