I read an article today that brought up two great points: Housing bubbles are worse in localities with high land use regulations, and federal housing policies geared towards subsidizing low-income homebuyers encourage folks who can’t afford to buy to do so anyway. Tag on ridiculously low federal funds interest rates for way too long and you have a recipe for disaster.
There’s much talk about the “credit crisis” and “housing bust,” but the root cause for both is the housing boom. There are several key regulatory, fiscal, and monetary policy factors that contributed to, and likely can be aggregated to have caused, the unprecedented housing boom that ended in 2006. It was this unsustainable boom that ultimately led to the excesses that nearly collapsed our financial system. We all hear about unscrupulous lenders (there were many of them), greedy investment banks (there were several of them), and lack of regulation to contain the circus. But what about the notion that perhaps this was caused and perpetuated because of regulation?
The culprits can be categorized into three groups: local regulators, federal policymakers, and the stewards of our monetary policy. The first are one of the chief instigators of wildly varying local housing markets. There’s a reason San Francisco and Los Angeles real estate increased at multiples of the rates from tamer, but actually higher growth, markets such as Houston or North Carolina. Local, city, and state regulators determine the constraints of new developement through land use regulations. These restrict new supply from freely entering the market to offset increasing demand.
Federal policy is also largely responsible for this last boom. The Department of Housing and Urban Development (HUD) dictated to Fannie Mae and Freddie Mac to increase their portfolio of subprime mortgages. This was plain and simple social policy in action. The goal was to increase rates of homeownership amongst low-income demographics. We are finding out now the hard way that many of these people could not afford their homes after teaser rates expired and housing prices stopped growing at double digit rates. Thank you HUD for encouraging them into the market! A new and scary player in this regulatory roulette is the Environmental Protection Agency (EPA), linking climate to land use regulation. America, beware!
Finally, we cannot escape monetary policy. It is the Federal Reserve that controls prices for money through various tools that affect interest rates. After 9/11 Alan Greenspan dropped the federal funds rate to near-zero, which was likely in the negative real interest rate territory. He kept rates in this territory for a sustained period of time, only slowly and very incrementally raising them through the peak of the housing boom. Low rates signal the market to borrow borrow borrow. Negative real rates provide negative incentive to save; the omnipotent, omniscient Federal Reserve board of governors sits on the same pedistal of power that Kremlin Communists used to perch whilst dictating grain prices and pretty much everything else in their defunct economy.
Understanding how regulations, federal fiscal and monetary policy affect housing prices can help you protect yourself in the future and perhaps play the speculative game in your favor. At the very least this illustrates that there is more going on in the background than is typically discussed when people scream for new regulation. Compounding one set of new regulations on top of another causes more confusion than alleviation of our growing number of problems.