Bubble Redoubled



In his July 2006 cover story for reason, Joel Miller diagnosed America's real estate bubble in the very month the bubble popped. "In 1985," Miller wrote, "the median price for a home in the San Francisco Bay Area was about $258,000 in inflation-adjusted dollars; today, it's over $720,000." At that time in San Francisco, a person could theoretically "make more money simply owning a home than working a median-income job."

"The Politics of Sky-High House Prices" examined how local, state, and federal regulations were driving up the cost of real estate. Delays in permitting were adding $7 to $14 per square foot to the cost of residential housing. A large development in Sutter Basin, California, saw $2,000 per acre tacked onto its prices by environmental fees designed to protect garter snakes. When homeowners in Fairfax, Virginia, complained that government wasn't doing enough to boost "stagnant" home prices, the rent seeking was overt. 

But state interventions designed to alleviate the shortage of housing also contributed to the problem. San Jose handed developers $180 million in affordable-housing subsidies to deal with a regional overpricing of real estate that was closer to $100 billion. And in other parts of California, "inclusionary zoning" requirements were adding up to $100,000 to the cost of a housing unit. 

The real estate boom began to bust shortly after that article was published, taking with it some major banks and trailing in its wake trillions of dollars in bailouts, federal receiverships for the government-sponsored entities Fannie Mae and Freddie Mac, and efforts at both fiscal and monetary stimulus. Fortunately, all of these efforts have failed. House prices continue to plummet as of this writing. 

Nevertheless, the experts Miller cited in his article are still up to their old tricks. Janet Yellen, the president of the San Francisco Federal Reserve Bank whom Miller quoted calling inflated home prices "a symptom of the Bay Area's success," was promoted to vice chairwoman of the Federal Reserve System in 2010. Elizabeth Warren, the Harvard law professor and "Warren Reports" blogger who appeared in the story calling for more regulation of the lending industry, is still peddling that solution today, though the Fed reports that mortgage borrowing growth has been negative for three straight years. In September, Warren announced a run for the U.S. Senate.