Housing Policy

The Next Bubble

The government's working hard to inflate another housing bubble

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They're doing it again!

When the last housing bubble burst, politicians blamed "greedy banks." They said mortgage companies lent money recklessly, making loans to people with dubious credit, for down payments as low as three percent. 

"It will work out," said the optimistic bankers. Regulators didn't disagree. Everyone said, "Home prices will keep going up." And home prices did—until they didn't. 

The bubble popped in 2007. Lots of people were hurt, and politicians took more of your tax money to bail out Fannie Mae and Freddie Mac along with reckless banks. They also gave the Federal Housing Administration a $2 billion bailout.

Then the politicians said, "We'll fix this so it doesn't happen again." Congress passed Dodd-Frank and a thousand new regulations. The complex rules slowed lending, all right. It's one reason this post-recession recovery has been abnormally slow.

But—April Fools'!—the new rules didn't solve the problem of reckless lending, and it's happening again. 

Because our government subsidizes home purchases, recklessness is invited. Somehow, Americans buy cars, clothing, computers, etc. without government guarantees, but politicians think housing is different. 

Both parties support the subsidies. 

The left wants government to help struggling families, and the right thinks home ownership sends a wholesome cultural message. Both parties have cozy connections to home-builders and lenders. 

At the time of the housing crash, most high-risk loans were guaranteed by the government. Those banks wouldn't have been as reckless if they had their own money on the line. 

But they knew they could grant a mortgage to most anyone and the FHA would back it or government-sponsored companies Fannie Mae and Freddie Mac would buy it. That fueled the frenzy of lending.

After the bubble popped, I assumed the political class would learn a lesson, but they haven't. Today, even more American mortgages are guaranteed by government. More than 90 percent of new loans are backed by taxpayers. After the crash, Fannie and Freddie did raise their minimum down payment—to a measly five percent—but a few months ago, they lowered it again to three percent!

Are they crazy? A sensible congressman, Rep. Jeb Hensarling (R-Tex.), tried to get an answer from the administration's new mortgage regulator, asking in a hearing, "All things being equal, is a three percent down riskier to the taxpayer than a ten percent down loan?"

A pretty basic question—but one that director Mel Watt still dodged, responding, "Mr. Chairman, that is generally true. But when you pair the down payment with compensating factors … look at other considerations … you can ensure that a three percent loan is just as safe." 

What? That's nonsense. This is what happens when pandering politicians get to dispense your money. Watt is among the worst. When he was a congressman, he pushed for mortgage subsidies for welfare recipients who made down payments as low as $1,000.

Edward Pinto, who studies housing risk for the American Enterprise Institute, says policies like this put us on the way to another bubble: "The government is once again … saying, let's loosen credit, give loans to people that potentially can't afford them, and everything will be fine because house prices will go up." 

On my show, former FHA commissioner David Stevens, who did improve lending standards a bit after the crash (before Watt and his cronies weakened them), responded that this time the government has new regulations that will prevent things falling apart: "I think in the effort, post-recession, to make sure we never go down this path again, we have created more rules than ever existed in the history of this country." 

But more rules aren't a solution. Government's regulators didn't foresee the problems last time. Fannie and Freddie got a clean bill of health right up until the collapse. 

The solution is less government involvement. Canada doesn't have a Fannie, Freddie or FHA. Canada didn't have the trauma of a housing bubble. In Canada, lenders and homeowners risk their own  money. 

Does that mean Canadians cannot afford homes? No! Without all that government help, Canada's homeownership rate is higher than ours.

© Copyright 2015 by Creators Syndicate Inc.

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  1. But when you pair the down payment with compensating factors … look at other considerations … you can ensure that a three percent loan is just as safe.”

    Those are some magical ellipses. The laws of physics were suspended by…and then he walked across the water.

  2. Light the Shriek signal!

    1. Shriek popped his head out of Obamas ass and saw his shadow…..we probably won’t see him for another six weeks.

      1. Nice.

      2. And we named that day Turtlehead Day.

  3. Does that mean Canadians cannot afford homes? No! Without all that government help, Canada’s homeownership rate is higher than ours.

    Unpossible! Why, without our benevolent masters providing for us, we would all be living in trees and caves! You didn’t build that!

  4. Wait, does this mean I can trick the government into giving me a home loan? Now if only there were any houses worth buying. They’re all priced too high for what you get.

  5. Good. We got in on the bottom last time, and we’ll be looking to upsize in about 5 more years. So if we don’t get in on the upcoming bubble, we’ll catch the next one.

  6. There’s absolutely another bubble happening now. My wife and I are looking at possible new houses, and the prices are doing what they did at the earlier end of the last bubble–shooting up for no good reason.

    For whatever reason, the government really wants to make lenders hand out money for home ownership. I suspect it’s for taxes and other things governments like, not to mention the popularity with people who want to buy much more than they can afford (and go into more debt than they can afford), but it’s nonetheless a really dangerous market intervention. I’m not sure our economy can handle another crash without even more pain that the last one.

    1. This wouldn’t be a problem if the greedy billionaires would just hand their treasure vaults over to the government.

      1. What’s sad is that even if that happened, they’re spending too much money to be covered by that final solution of theft.

        I’m pretty worried about what the next crash will do, especially given that the government doesn’t look to be slowing down and given the likelihood of other crashes, like in higher education. While there are benefits at the bottom of a crash, they also cause a lot of damage, including to consumer confidence. Our house of cards isn’t exactly stable. What’s the government going to do, hand money to cronies again, lower interest rates, print more money?

        1. Yes.

          1. I believe it is yes, yes and yes.

        2. This time it will work

          1. The horse isn’t dead, they just have to hit it harder!

            1. Hey, it worked on that episode of Grey’s Anatomy.

    2. I’m looking at new (to me) houses right now also. Prop 13 makes it really hard, though.

      The smart thing to do would be to keep the one I have now, and rent it out. God damn property taxes.

      1. We’re waiting this one out, though we have some protection, regardless of what happens, by already owning a home in the market. I’d like to get some land next time, but that’s crazy expensive already.

        1. You ain’t just whistlin’ Dixie. My other tabs are open right now to realtor pages – buying land. I think I’d rather buy a car, it’d be less of a pain in the arse.

        2. I’m protected as well. 100% equity, house has doubled in value.

          If I move, I could be looking at double my current property taxes. That could sting a bit.

          1. Yes, that’s another disincentive to moving. Fucking government.

  7. These articles always omit why Lehman, Bear, Merrill and others (who were completely unregulated from a banking/mortgage standpoint) gorged on non-conforming loans and cratered the economy.

    1. Right! Because of the implicit guarantee by Fannie and Freddy per the Community Reinvestment Act under Carter and given SIGNIFICANT emphasis under Clinton and then turbocharged (and characterized as “rolling the dice”) by BAWNEY FWANK…. right?

      You’re “classically liberal”, after all…

      1. You don’t know shit about this subject.

        The implicit guarantee is only on FNM/FRE bonds investors buy – not on loans banks write. Plenty of GSE loans were defaulted on and they lost a ton of money on them. The bondholders were made whole while FNM/FRE stockholders lost almost everything.

        Go back to listening to Fat Rush (praise be unto him) for your misinformation.

        1. You can’t even get your talking points right.

        2. God, what an intellectually dishonest dipshit you are.

        3. A close friend of mine who worked in and with DC ‘back in those days’ told me that when Fannie transferred loans to Freddie, Fannie essentially wrote the value of the loan in pencil at the bottom of the form, Freddie took the number as accurate without ever checking it, and THAT was one of the reasons the whole thing blew up.

          I was in CA during the bubble. Local laws denied owners the right to build UP and greenies demanded that cities not be allowed to build OUT into those pristine views of the mountains around Si Valley.

          Limit supply, advertise plentiful job opportunities and a climate that’s damned near perfect, and No Shit! Housing prices skyrocket.

          I bought my Cupertino house in very early ’79 and sold it in September of ’05 for something like 7-8x buying price, and owned the house mortgage-free at the time. (thanks, stock options!) and moved to NC on the edge of a large city and bought 7x the land and 2x the square footage of house as Cupertino, but at about half the price of CA home. (practically had to take out a home equity loan to establish a local credit rating.)

          Thanks, Stupid Government… Heard a few months ago that a city in CO is passing the same kinds of ‘low-height, no-sprawl’ regulations for Their Fair City. Wait 5-20 years and see what THEIR home prices look like, and how Their Government Leaders will be demanding laws to make homes “Affordable.”

          As one wag in CA put it, “All Homes Are ‘Affordable.’ ” But only if you think about it.

    2. These articles always omit why Lehman, Bear, Merrill and others (who were completely unregulated from a banking/mortgage standpoint) gorged on non-conforming loans and cratered the economy.

      You say this about the the most hyperregulated financial system in the world. You are either liar or a buffoon, maybe even both.

      1. The government relaxes the rules so big banks can dole out loans (home ownership, opportunity) and take more risks, and liberals characterize that as “deregulation”. Doesn’t make sense.

        If financial institutions were regulated to the point where only the most qualified borrowers could get loans, there would be a lot of C+ people of color who won’t get 100 thou in student loans to pursue a worthless degree. And then liberals would call that “discrimination”.

        People like free stuff, but the banks, unlike the government, can’t print their own money once they’re broke.

    3. “completely unregulated”

  8. What’s to worry? Shriek sez all is well! The econ is great and we’re just a bunch of Rethugs calling ourselves Libertarians, who’ve got a bad case of gas because we secretly hate Chicago Jesus and want him to fail!

  9. Have I mentioned I like Stossel?

  10. My ex-wife makes $75 every hour on the laptop . She has been laid off for seven months but last month her pay check was $18875 just working on the laptop for a few hours.
    Look At This. ???? http://www.jobsfish.com

  11. Can they please wait until I sell my house? This thing’s making almost as much as I do.

  12. Peter Schiff (the guy who predicted the last crash in the face of blistering criticism) has been talking about this for months. He knew then and he knows now.

    1. Think about this… Schiff and his cohort have predicted roughly 25 of the last four recessions or ‘corrections.’

      If he’s so smart, why does he sell books that allegedly enable purchasers of the books to compete with him for the same dollars in the same marketplace?

      Gee… unless he’s trying to get YOU to compete with YOUR cohort while he makes his money selling books, financial advice subscriptions and gets money on speaking tours.

      D’oh?

  13. The collusion between the federal government and banks with the Federal Reserve, FDIC, FHA, HUD, Freddie Mac, Fannie Mae, Community Reinvestment Act and more is what led to the financial crisis.
    When government gets in bed with big business we get: ratings agencies rubber stamping investments, regulators looking the other way, banks giving liar loans, the government bailing out banks and taxpayers paying for everything.

    Abolish the Fed, FDIC, FHA, HUD, Freddie Mac and Fannie Mae. Repeal the Community Reinvestment Act.

  14. Liberals are convinced that someone else has deprived them of the means to a better life, so that saving doesn’t register. And fiat money means they can dip into those others’ pockets with impunity. Business doesn’t mind because the process inflates equities at the same time. The result is a vanishing middle-class.

  15. John Stossel is incorrect when he says:

    “Canada doesn’t have a Fannie, Freddie or FHA. Canada didn’t have the trauma of a housing bubble. In Canada, lenders and homeowners risk their own money.”

    We have the Canadian Mortgage and Housing Corporation, a government agency that guarantees mortgages taken with less than a 20% down payment. They guarantee mortgages up to $1 million, and require a minimum of only 5% down, and up to 30 years to pay it back.

    We had the makings of a housing bubble in 2008, when yours burst, but the Bank of Canada (equivalent to your Fed) dropped rates to 1% and housing took off. If we didn’t have a housing bubble in 2008, we sure do have one now.

    Today, the average price of a single family detached in Vancouver is $1.9 million. The same house in Toronto over $1 million. March year over year prices are up 15% in those markets.

    I absolutely agree with Stossel that less government would prevent these kinds of bubbles. But Canada is most definitely not the right example.

  16. Yes, very useful information. When I got mortgage, my life changed because my expenses increased. Of course, people always feel a temptation to spend their money on some desirable things like new car and traveling. However you can do that just after covering necessary payments, taxes, credits and paying bills to utility companies. My friend used to visit money services and as result she is bankrupt. So, when I was short on cash I didn’t know what to do. But I found lenders whom I can trust. So, if you have financial trouble you can read here if you need quick cash loan. But you must very responsible when you get next loan.

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