You’d be forgiven for thinking that all is right with the housing market these days. With prices and sales both soaring nationally, the housing panic of 2007 seems like an all-but-forgotten nightmare. But it’s still very much with us.
The prestigious State of the Nation’s Housing report for 2017, published by Harvard’s Joint Center for Housing Studies just last week, touts the newfound health of the housing market.
“A decade after the onset of the Great Recession, the national housing market is finally returning to normal,” the report says. “With incomes rising and household growth strengthening, the housing sector is poised to become an important engine of economic growth.”
Indeed, the trends outlined are impressive. In 2016, U.S. home prices rose 5.6%, “finally surpassing the high reached nearly a decade earlier,” the report said. And the number of homeowners still underwater on their mortgages now totals just 3.2 million, down from 12.1 million in 2011.
Given such bullish housing trends, Americans might be tempted to think that 2007 was an anomaly, a one-off disaster that won’t be repeated. But, in a new first-person account of the financial crisis, a leading housing economist for Freddie Mac suggests that’s not the case.
Susan Wharton Gates, who worked for Freddie Mac from 1990 until she resigned in 2009, provides a long litany of past sins that led to the housing crisis, including “expansive Federal Reserve monetary policies, loosely regulated subprime mortgage brokers, unregulated and rapacious Wall Street investors seeking high-yielding assets, conflicted credit rating agencies that failed to accurately assess the risk of subprime securities, millions of suckered, naive or conniving borrows, and widespread regulatory lapses.”
And the problem, she told a recent housing conference, is that many of these same policies and attitudes remain in place today. Americans who think the housing market is back may be ignoring that fact.
Nor is Gates alone in her concern, a lone voice in the wilderness. Indeed, she’s only the most recent of a number of other former housing officials and economists who are sounding the alarms about federal housing policies that could, conceivably, once again lead to a housing market meltdown.
Peter J. Wallison, an American Enterprise Institute fellow and author of “Hidden in Plain Sight: What Really Caused the World’s Worst Financial Crisis And Why It Could Happen Again,” says that Congress’ 2010 response to the housing market collapse didn’t address the underlying causes of the financial crisis: The imposition of quotas by Congress and federal regulators on mortgage lenders to make more than half of all their loans to low-income borrowers, a recipe for financial disaster.
“What Congress did not understand when it adopted the goals was that Fannie and Freddie — which were by far the largest buyers in the mortgage market — set the underwriting standards for everyone else,” Wallison said earlier this month. “As a result, their reduced underwriting standards spread to the wider market, creating the subprime loan jamboree that ultimately led to the financial crisis.
“By 2008, more than half of all mortgages in the U.S. were subprime, and of these 76% had been bought by government agencies, primarily Fannie and Freddie,” he added. “That shows, without question, that government created the demand for these loans.”
Meanwhile, the Dodd-Frank financial reform put forward by congressional Democrats was not only an inadequate response to the housing crisis, but actually made the economy far worse and doomed the U.S. to eight years of subpar economic growth.
Commenting recently about the CHOICE Act, which repeals major parts of Dodd-Frank, Wallison argued that Dodd-Frank is “primarily responsible for the historically slow recovery of the U.S. economy since the 2008 financial crisis” and that it was “completely unnecessary.” Wallison, who was a member of the official Financial Crisis Inquiry Commission in 2009, wrote a scathing dissent to the committee’s official report, which seemed to blame Wall Street and inadequate federal regulation for the meltdown.
In fact, the historical record of the early 2000s is pretty clear: Federal meddling in U.S. housing markets was almost entirely to blame for the housing crash and subsequent financial crisis that cause markets to panic and sent the economy into a tailspin. And the federal government is still in the business of directing housing, despite the clear lessons of the recent past.
Those who argue for more, rather than less, government involvement in private sector housing need to adjust their opinions. Back in 2006, many people thought the housing market with all that government intervention was doing just fine. Then came 2007. Do we really want to repeat that ugly past?
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