How Real Estate Came to Own Us

By: Douglas_French

Cheap money, buyer tax incentives, lack of new supply, nothing seems to keep home prices elevated. The Standard & Poor's/Case-Shiller Home Price Index fell 1 percent in December. Prices fell in every market excepting Washington, DC, where the business of doing the people's business continues to expand seemingly without end.

Prices in 11 of the 20 markets included in the index sank to postbust lows: Atlanta; Charlotte, North Carolina, Chicago; Detroit; Las Vegas; Miami; New York; Phoenix; Portland, Oregon, Seattle; and Tampa, Florida.

"There's just way too many homes out there relative to demand and we're not going to see that change anytime soon," said Joshua Shapiro, chief US economist for MFR, Inc.

Robert Shiller thinks price declines have another 15 to 25 percent to go, due to all the empty houses with no buyers, proposals to reduce the mortgage-interest tax deduction being floated, the uncertain futures of Fannie Mae and Freddie Mac, and Middle East unrest.

The whole idea that every American should own a home just isn't working out. And that is the seed of the housing boom: a government agenda to make everyone an owner of their own cozy home-sweet-home. A seed planted by Herbert Hoover back in the 1920s when he was an ambitious secretary of commerce. Not many authors writing about the housing boom and bust have chased the story back this far. Alyssa Katz does so in her book Our Lot: How Real Estate Came to Own Us.

Katz gets to the nub of it beautifully on page 3:

Owning homes would serve as a force to better the world — to build stronger families, more pleasant communities, financial security, a sharing of wealth through generations. That idea has been embedded in the national psyche, not through any innate aspiration in the human spirit but by dint of methodical, deliberate salesmanship and an array of incentives seemingly too powerful to refuse.

In the 1930s, FDR wanted to get housing going and he enlisted the help of two executives, who had formerly sold and financed cars, to put together the FHA-insured mortgage program that gave homeowners comfort that their loan terms were long-term. Just make the payments on time for thirty years and the house with the white picket fence will be all yours! At the same time candidates for office like Charles Percy were on the stump telling voters,

For a man who owns his own home acquires with it a new dignity. He begins to take pride in what is his own, and pride in conserving it and improving it for his children. He becomes a more steadfast and concerned citizen of his community. He becomes more self-confident and self-reliant. The mere act of becoming a homeowner transforms him.

Percy referred to renters as "slaves."

And so it began, the federal government's agenda that Americans not be beholden to greedy landlords but be strong independent owners of property with no one to answer to but God, the local tax authorities, and the mortgage lender (whose investment was guaranteed by FHA). What on earth could possibly go wrong? This is indeed the American way.

From her beginning with the Hoover/FDR agenda, the author then cleverly weaves a number of divergent stories together to form her housing tragedy. You haven't heard of most of the people Katz writes about but all in their own small ways own a piece of the housing-boom-and-bust story.

In her opening chapter, the author pairs Chicago housing activist Gale Cincotta with legendary Salomon Brothers trader Lewis Ranieri, who was immortalized by Michael Lewis in his book Liar's Poker.

Cincotta wanted people in inner-city neighborhoods to have access to credit. She ultimately took her cause to Washington, and in 1991 Congress forced Fannie Mae and Freddie Mac to start buying loans that had been made to poor people.

Meanwhile Ranieri was working on a financial product that would comprise mortgages bundled together, becoming bonds to be sold to investors. At the time, he didn't even have a name for what would become securitizing of mortgages.

Next we meet a nice young couple who buy a home in 1996 with FHA financing. The next thing Spencer and Lisa Kasten know they become a photo op for President Bill Clinton at the Homeownership Summit. In perhaps the book's best chapter, the author chronicles the Clinton agenda to increase the number of homeowners. The Clinton administration was manic: "As someone at HUD calculated it, they would have to add one new homeowner every 24 seconds, 24 hours a day, 7 days a week, 365 days a year," Katz writes.

All the usual constituencies threw themselves behind "The National Homeownership Strategy," a program that emphasized responsibility, right in step with Clinton's welfare reforms. After designating the first National Homeownership Day in 1995, Clinton mentioned homeownership in eight speeches leading up to the 1996 election. He even waxed eloquent about his first house of a thousand square feet, saying he used it to propose to Hillary. "Don't you think you'll have to marry me so I won't have to live there by myself?"

Sunny Orange County California is the back drop for the genesis of subprime lending. Mortgage lenders couldn't figure out how to get the money out the door fast enough with lenders quickly watering down loan-underwriting requirements whenever a competitor seemed to have the upper hand, all in the name of breaking down the barriers to homeownership.

"Our innovative industry has created a great way to expand homeownership by offering loans to those who can make payments, but don't qualify for 'A' paper because of poor credit or bankruptcy," Mortgage Bankers Association former president Ron McCord told the MBA annual convention in 1997.

A decade later home-mortgage debt had ballooned to $11 trillion from just $1.3 trillion back in the early 1980s. America not only had too many houses but too many people peddling loans. There were but 7,000 mortgage brokers in 1987, the author writes, and by 2004 there were more than 44,000 employing 418,000 people. These mortgage brokers originated loans to be sold to the vast new secondary market. A market that couldn't get enough product. The unscrupulous fraudulently worked the system as Katz colorfully narrates in a story about massive loan fraud in a tony subdivision in Atlanta.

The author even works the publicly traded builders into her story, noting that mom-and-pop builders all over the country sold out for top dollar to the Lennars of the world near the height of the boom. But of course all of these builders were just paper contractors. They held but one asset worth buying: land. With stockholder money and cheap financing from Wall Street, these public builders went on a buying spree from sea to shining sea, driving up land prices in all of housing's hot spots.

Alyssa Katz is not an economist or financial analyst. According to the cover-flap bio, she teaches journalism, writes for a variety of publications, and lives in Brooklyn. She neatly brings her story home at the end of the book relating her nightmare of being chased from her rental unit when developers bought her building to convert to condos.

Virtually all of the elements of her story serve to drive up the price of New York real estate: cheap money, easy loans, and demand from high-salaried Wall Streeters who were packaging mortgage securities. However, the primary culprit in the author's view is the erosion of rent control. She writes, "the movement to minimize government's role in the economy was throwing renters into free-fall." Renters have been played by the free-marketers, she claims. Thirty years ago, one in ten cities controlled rents. No more.

With landlords able to drive up rents with impunity, renters had to become owners out of self-defense. "[I]t's impossible to make a blanket case for or against rent control," Katz writes, "any more than it's possible to say that police are always a force for good." The author believes any problems with rent control can be worked out with the right political finesse requiring "mechanisms to let landlords increase rents to cover their costs: otherwise, rent controls create slums."

Katz doesn't mention the distortions to property uses that rent control creates or the political corruption it manifests. She doesn't realize that rent control essentially takes housing stock off the market, decreasing supply and thus, with the same demand, driving up rental rates for unregulated apartments as well as the prices of for-sale units.

What the author does understand is that "every intervention [to rescue the housing market] Congress has cooked up so far is doomed to make the problem worse" and that government is doing everything it can to prop housing prices up consigning "future generations to the same trap, huffing on a treadmill of debt, or alternately to a cure of inflation that hikes the price of everything else."

But the real-estate market is a hard mistress for the government to master as the Case-Schiller numbers point out. The author runs a slight thread of argument through Our Lot that blames Reagan's free-market ideology for Americans being weighed down by $13.2 trillion in mortgage debt and millions being bankrupted by the whole mess.

At the same time, Katz clearly fingers the government for its "mind-blowingly naïve" housing scheme that has, using her analogy, turned us all into so many rats being rewarded cocaine for pushing the real-estate lever.

The answer is let the Fannies and Freddies fail, allowing underwater mortgages to be repriced in the bankruptcy auction marketplace. The new debt holders will eagerly make new deals with mortgage payers, just as Selene Residential Mortgage Opportunity Fund, run by none other than Lewis Ranieri, does.

Only the free market can set homeowners free.

Douglas French is president of the Mises Institute and author of Early Speculative Bubbles & Increases in the Money Supply. He received his masters degree in economics from the University of Nevada, Las Vegas, under Murray Rothbard with Professor Hans-Hermann Hoppe serving on his thesis committee. See his tribute to Murray Rothbard. Send him mail. See Doug French's article archives. Comment on the blog.

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