Civil Rights

Affordable Housing Means Your House Is Worth Less

Consumer advocates have their priorities backwards.


Martin Luther King famously once proclaimed, "I have a dream, that one day my children would not be judged by the color of the skin, but by the content of their character, and that they would have a right to a home at an affordable price."

Okay, that's not exactly what he said. But an unusual coalition of financial institutions and community housing advocates has been arguing this.

The Dodd-Frank Act, passed last year revamping rules for financial institutions, directed all bank regulators to issue a joint regulation defining a reasonably safe, well-underwritten mortgage. Their recent proposed definition for such a "qualified residential mortgage" has created a stir because it has strict guidelines such as a 20 percent down payment requirement and tight limits on the collective debt of the borrower.

Rather than praising the definition of a good mortgage for ensuring borrower safety, consumer groups have criticized the regulation as being too strict, since banks would have to hold more capital against any loans that are riskier than qualified residential mortgages, meaning that financial institutions would charge more for mortgages with lower down payments.

"This is a civil rights issue," John Taylor, president of the National Community Reinvestment Coalition, said recently.

Mortgage Bankers Association CEO David Stevens echoed the sentiment: "We still need to be able to make affordable mortgages that don't just go to the wealthy, who can afford the biggest down payments and who have the most positive credit ratings." Such a kind heart from a man whose organization has lost significant business in the past few years as mortgages to less qualified borrowers have dried up.

Stevens, Taylor, and the leaders of other groups such as the Center for Responsible Lending and the National Council of La Raza (not to mention the realtors and homebuilders associations) have been teaming up to fight the qualified residential mortgage definition on the grounds that it will cause low-income households to spend more time saving up for a down payment while increasing the cost of mortgages.

But why is access to affordable homes equated with access to affordable mortgages, i.e. debt? They are not the same thing.

This coalition is nothing new. Such groups were also aligned in the late-1980s hawking a similar product. MLK's wife even gave a speech in 1989 encouraging President George H.W. Bush to push for "affordable housing" as a part of her late husband's dream for civil rights.

Ultimately, the Government Sponsored Enterprise Reform Act of 1992 was passed creating "affordable housing goals" targeted at increasing lending to low-income families. But the trade-off for access to cheaper mortgage debt—often through a subprime loan—was that housing prices increased.

Affordable mortgages replaced affordable housing.

As Fannie Mae and Freddie Mac expanded their purchases of subprime mortgages throughout the 2000s, the prices of homes kept growing and growing—requiring more and more federal subsidies to keep pace. That is partly because as mortgage prices fell, demand increased for homes, and prices rose. It was basic economics at work. 

Sure, increased mortgage rates can be quite the deterrent to homebuyers, especially first-time homebuyers. But so can high housing prices.

Yet Janis Bowdler, a research project director at La Raza, still argues that the new Dodd-Frank authorized regulations will "so significantly deter the ability of first-time buyers to break into the market that we will see a real decline in home ownership." 

The issue of whether increased homeownership is a good thing is a matter for a different column. The confusing part of Bowdler's comment is why she isn't pushing for lower housing prices if she is worried about first-time buyers.

With virtually ever other commodity, innovation that improves quality and lowers price is seen as a good thing. Only because of the misperception that owning a home is a universally good investment for households do we favor rising home prices. (Well, that and the politics of housing prices.)

But historically, home prices on a national level have generally grown just at the rate of inflation. Only during the recent housing bubble did prices break from their historical trend and double over the course of 10 years. It is a myth that homeownership inherently creates wealth.

Now, home values have been falling since 2006 as the bubble has deflated and we are almost back to the historical trend line that dates back to the end of World War II for housing prices. But a host of federal policies—like the First-time Homebuyers Credit and the Fed's quantitative easing programs—have slowed the decline in prices; though they have not stopped it.

It's not that Washington should force prices to go lower, it's that La Raza and other consumer organizations should be clamoring for the government to get out of the way to let prices finish their fall back to natural levels. That would help first-time homebuyers since housing would become more affordable. 

Plus the households would have less mortgage debt with less needed to borrow. 

But if La Raza and their cohorts could write the rules, they'd keep the government involved while lowering the threshold for getting a federal subsidy. 

When the homeownership mob—to borrow a John Carneyism—won the day in 1992, the results were 1) government supported housing finance that put taxpayers on the line; 2) lower underwriting standards for housing finance supported by Fannie and Freddie; and 3) a bubble created by an artificial boost in housing prices. Ultimately, millions of low-income families were stuck with high and unsustainable debt, leading to the millions of foreclsoures we are wrestling with today.

The same thing will happen again if the consumer groups win again. Crippling overnment-subsidized debt is not a civil right.

Anthony Randazzo is director of economic research at Reason Foundation and author of "Privatizing the Housing Finance System: A Brief History of the Housing Bubble and Ways to Keep It From Happening Again."

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  1. I mean, gosh, who would have ever thought that pumping trillions of dollars of credit into the housing market might cause a bubble?

    1. It’s almost as if you CAN’T just print shitloads of worthless paper to fix the problem!!111

  2. TOLEDO, Ohio ? An Ohio restaurant mentioned last week by President Barack Obama as an indirect beneficiary of the government’s Chrysler bailout is going out of business.

    New Chet’s Restaurant in Toledo will close Sunday after 70 years.

    Co-owner Richard Lawrence says business has fallen victim to the economy and a smoking ban approved by Ohio voters in 2006.

    He told The Blade newspaper of Toledo on Wednesday that auto industry cutbacks also hurt. Lawrence says he used to deliver up to $300 worth of food per week to Chrysler Group LLC’s Jeep plant in Toledo, but now that’s down to about $100 worth.

    Obama visited the Jeep plant last Friday. He suggested that, without the auto plant’s workers, Chet’s and other local businesses would have fewer customers.…..72244.html

    1. some other nonsense that isn’t really related to the article. that’s what this is.

    2. He’s Merdas touch.

      1. *got the

        Need sleep.

  3. This is exactly right. Ultimately, higher housing prices benefit lenders, not consumers. It takes longer to pay it back, and there is a greater accumulation of interest both from the bigger principal amount and the longer repayment schedule. So the consumer ends up paying not just a bigger price for the house, but way more in interest to the banks.

    Especially in this market, when there has been a massive overbuild of housing, housing prices should be significantly lower than historical norms.

    More poor people are able to afford a $100,000 loan than a $400,000 loan, and be considered credit-worthy for it, even with the stricter loan terms. And they’ll end up with more disposal income over the long term to save for other things.

  4. Are these the same people that use the term “predetory lending”? So 20% is too strict and 0% is predatory… hmmm…

  5. Because the bubble bursting just wasn’t bad enough this time let’s go ahead and see if we can’t create the same problem again.

    1. …hair of the dog…

  6. We’re going by the old adage, “buy what appreciates, lease what depreciates.” We’re doing a deed in lieu on our house and renting in a much better city. Why aren’t we burning liberals at the stake? They aren’t the least bit shy about destroying everything, I see no need to play nice with them any more.

    1. Yes, it’s just the liberals.

  7. Amen.

    I hereby inaugurate the “Balko Award,” which is bestowed upon writers of items that contain high-quality common-sense analysis not weighed down with a bunch Objectivist bullsh!t.

    First recipient: Anthony Randazzo.

    1. Here here!

  8. I love it, this is insanity at its best.

  9. There is no political gain in letting the market sort it out, therefore Randazzo’s thesis won’t catch on.

  10. Ever since the housing market began to crash I have been asking people I overheard damning the Banks and Lenders if I was the only person in America who remembered when this idea that denying people a mortgage was a wrong to be righted, and economists from both ends of the political spectrum wrote op-eds saying “We hope you like bailing out lenders, because you are going to have to.”

    In the 19th century, when the economy did something alarming or stupid, there was usually some swine like Jay Gould in back of it somewhere. In the 20th century (and thus far in the 21st too) when the economy gets the yips, there is usually an ill-considered government program in back of it somewhere.

    Think we’ll learn before the turn of the next century?

    1. Happen to remember the names of any of those economists? I would really like to have that on hand.

  11. Article is very interesting,thanks for your sharing.

  12. I hereby inaugurate the “Balko Award,” which is bestowed upon writers of items that contain high-quality common-sense analysis not weighed down with a bunch Objectivist bullsh!t.

  13. OK! Difficult to buy a house!

  14. I never thought of that this way. Good writing. Hogan Originali
    hogan originali

  15. I would bet that La Raza and other organizations have direct ties to the mortgage industry.

  16. read Thomas Sowell on the subject of “affordable.”
    everything is affordable. Very few people are actually homeless or hungry in the US.
    “Affordable” means that I want the best of something for less than it costs to make it. I, too, would like an “affordable” five bedroom house, with a greenhouse, gazebo, three car garage, mudroom, and jacuzzi. However, they refuse to give it to me. If only someone would pass a law forcing someone to build me such a house and let me have it for $200 a month.

  17. I don’t mine the housing bubble. the price of homes have now come down to the range of my rent or less. Theres only one problem, I owe the IRS so much no one will give me a loan. Why do I owe them so much because the government believes that a self employed person who makes less than a person on unemployment still owes 1/3 of his salary to them. BTW I’m in the building trade.

    1. That’s capitalism for you, rape the small guy and let huge corperations hide their profits so they don’t pay any taxes.

  18. Homeownership is partially bad for the economy. It ties labor down to one spot, so that when there are employment disparities around the country, no one is willing/able to move to fill them.

  19. I’m not rich, I’m not poor but I do make more than the average U.S. worker. However, I’ve never understood how people afforded the McMansions they bought. I mean around here (where housing is fairly cheap) these are quarter-million dollar plus homes. Is it the double-incomes or the money they made from their previous house sale? Or was it the strange financing deals that were being handed out back then?

  20. You should be aware that “affordable housing” has a specific meaning in NJ. In broad summary, NJ affordable housing law requires developers to offer so many units of their development, indistinguishable from the others, at significantly reduced prices to buyers who “qualify” at some level of “disadvantage”. These prices are ultimately subsidized by everyone else who buys into that development. The recipients of the “affordable housing” are free to sell the unit a small number of years later at full market price, and pocket the additional equity.

    I point this out, because this is a distinctly different swindle under the same name.

    1. A few communities have addressed the concerns of the affordable flippers by have maximum appreciation and monitoring the sale by the local governing body. Unfreaking believable. Now we have beaureacracts in permanent employ to monitor what you can sell your property for.

  21. I have read elsewhere commentary to the effect that mortgage defaults are only poorly connected to 1st-time homebuyers with low down payments and subsidized rates. Instead, the problems of default are much more prevalent in 2nd mortgages, as established homeowners used their property as piggy banks.

    I would love to see a reliable analysis of this issue.

    1. This is my perception as well. I’d like to see the facts.

  22. As an architect I am aware that the prices are only low now due to the oversupply and foreclosures. They are selling at a loss. The cost of materials are up. Metals are way up. Fuel sensitive products (Asphalt, concrete) are way up. The land prices are down now but there is certainly a finite supply of that. Labor costs are competitive as the construction trade cuts itself to the bone. When we return to actually building, expect the prices to skyrocket.

  23. Speaking as a former mortgage broker that’s analyzed hundreds of home appraisals, I can tell you one thing they should change that would have prevented the huge run up in home prices: The length of time for the comp sales on the appraisal.

    I don’t know if it is a law or simply a voluntary underwriting condition, but comp sales on an appraisal had to be less than six months old. This means that the appraised value had no ties to more historical home values in the area. It was just a frenzied upward spiral in valuations with each sale fueling the higher price on the next appraisal.

    A more balanced approach would have required a comp sale with a date of 3 years, one with two years and one from 0 – 12 months. This would have kept prices somewhat anchored to the recent past and prevented the price bubble.

  24. OK. My comment has nothing to do – directly – with the content of Mr. Randazzo’s article. It does have to do with editorial sloppiness which I don’t expect from A very casual reading reveals at least 2 misspellings: 1st paragraph, page 2, “virtually ever” should probably be “virtually every” and the 2nd last paragraph on the same page “foreclsoures” should probably be “foreclosures”. C’mon guys. If the credibility of your content is reflected in your attention to editorial detail your “reasonableness” is in as much jeopardy as the mortgage market.

  25. Ditto on govt dogma and intervention preventing true home pricing to bottom out. Peter Schiff has an insightful treatment on this in the first 30 min of this video:

  26. Ultimately, millions of low-income families were stuck with high and unsustainable debt, leading to the millions of foreclsoures we are wrestling with today.

    Subprime defaults were just the first wave. Here in SoCal, most of the foreclosures now are coming from people who used their homes as ATMs to take out the bubble “equity” and spend it, and who don’t want to pay it back now that the house is worth 40 percent less.

  27. Ultimately, millions of low-income families were stuck with high and unsustainable debt, leading to the millions of foreclsoures we are wrestling with today.

  28. I am an aspiring architect and I am appalled at this crazy fucking idea we have pushed since ww2 that everyone needs to own a fucking house. You know what? Humans lived in highly dense areas for hundreds of thousands of years and we progressed to where we are today. Last time I checked, being a farmer is a hard life that usually sucks. We need to stop promoting this idea of suburban country living.

  29. Hello DesigNate,

    Ironically, one of the reasons why I want to buy a SFH are expressed in another comment in this article: The effects of smoking bans. On the one hand, restaurants that cater to smokers may go out of business. On the other hand, when a restaurant or condominium complex allows smoking, the non-smokers go elsewhere.

    And I’m one of them.

    I rent a condo, but I would never buy one thanks to captain stinky downstairs.

    Another habit I think is cool is when a biker revs up his bike driving around a condo complex and wakes everyone up. He’s soooo cool! Yep, smokers and loud bikers: abusing freedom to make socialism appear tolerable by comparison…

  30. Excellent blog! Do you have any helpful hints for aspiring writers? I’m planning to start my own blog soon but I’m a little lost on everything.

  31. there is only one alan shearer

  32. I am an aspiring architect and I am appalled

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