The Housing Boom and Bust: Revised Edition

[...]The brilliant Thomas Sowell has jumped in the fray of dissecting the 2008 economic collapse. His book is particularly focused on the housing market, an area of economics he understands as well as anyone. I very much doubt that my series of book reviews will cover too many more books that I enjoyed as much as this one. This is a valuable, readable, concise, and delightful work.The advantage in reading Thomas Sowell about the housing bubble's collapse, or any other economic phenomena that Sowell analyzes, is that you get supply and demand principles stamped across your forehead repeatedly. You can not escape it, because he will not let you. Sowell understands the laws of supply and demand as well as any economist the world has ever seen, and he therefore understands the catastrophic effects that distortions in supply and demand cause. He has no interest in seeing basic economic laws trumped by opportunistic politicians playing Russian roulette with people's lives and well-being for the sake of a poorly constructed social or political agenda. Sowell does not initiate the book analyzing monetary policy, bank underwriting, Wall Street leverage, or any of the usual cast of characters. He goes after the land-use requirements and extraordinary building restrictions that created artificially low supply in the market, and did so in certain communities on a massive scale. Admittedly, one of the most eggregious offenders of this unintended consequence interventionism was the Bay area of California where Sowell resides, so his perspective is probably dramatized. But Sowell cogently and patiently takes to task the bureaucrats who gave way to the phenomena of inadequate supply via restrictions on growth and building density.By Chapter 2 he has really taken off the gloves, and it becomes time for this intellectual superior (which he surely is) to give a little vocabulary lesson to a media-saturated culture that has taken too much at face value for too long. Sowell goes after the worthless expression, "predatory lending", pointing out that "the only common denominator in this accusation is that the critics don't like them.". He hits his stride in questioning the use of the expression "affordable housing" by the political elite. Individuals know what they can afford within their incomes, says Sowell. The need was not for "affordable" housing, for one man could "afford" rent on an apartment, and another could "afford" a mansion, and everything in-between. Sadly, what we mean by the expression is that "individuals choose their housing, and then the government somehow makes it financially possible for them to have it." So if government manipulation is helpful in creating "affordable housing", why have monthly housing expenses as a percentage of income done nothing but go up as long as the government has been pursuing a policy of greater "affordability"? Is this an unfair question? Sowell filets the notion that the government could create more affordable housing if they wanted to.A great deal of time has been spent critiquing the Community Reinvestment Act of 1977, and demonstrating its complicity in the housing crisis we now suffer. What Sowell does, though, is not just blame the Act for the unwise practice of trying to use economic policy to effect a social outcome; he points out the sheer waste that such an Act is to begin with. The Act exhorts "financial institutions to help meet the credit needs of the local communities in which they are chartered, consistent with the safe and sound operation of such institutions.". Why in the world does a business need an act of Congress to pursue a profit motive, and why does it need Congress to tell it to whom it should lend money? Are politicians more qualified to influence these sorts of decisions than stakeholders? If a borrower is deemed to be a worthy recipient of credit, and the bank prices their own desired cost of funds into the arrangement based on their risk/reward analysis, is this Act even necessary? And on the other side of the equation, if a borrower is not deemed to be worthy, can any sane person argue that it is good for government mandate to encourage the business to lend to him anyways? This is patently absurd. Financial institutions may not be perfect in determining which borrowers are going to be creditworthy, and which are not going to be, but the profit motive they work for makes them inherently more qualified to judge such a thing than the social and political agenda driving elected officials.Sowell's final chapter is hard-hitting and climactic. "No doubt perfect government regulation could have solved the housing market problems, but a perfect operation of the free market could have solved them as well.". But of course! And this is what I adore about Sowell - his ability to turn an argument around on his opponent so graciously, and yet so powerfully. We all accept that imperfect capitalism can create imperfect results at time, but to contrast imperfect capitalism with perfect regulationism is ridiculous. Yet, it is exactly what the modern day argument has to do to sell the public on the idea that the animal spirits of the free market led us into this disaster, whereas the noble and efficient fist of the government can keep us out of the next disaster. Who believes that regulatory efforts will be perfect? On what basis do we believe that an increase in regulation and re-drafting of governmental jurisdictions will be effective? Is it on the basis of their success in maintaining a strong dollar? Is it on the basis of their track record of weeding out Bernie Madoff and others? Since when do we replace a C student with an F student and call it progress?Society needs a paradigm shift in how they think about these affairs, or we are going to re-live them. I believe that with every ounce of breath in my body. We have got to quit looking at the government as "the public interest personified". The track record here is abysmal, and Sowell stoically closes his book with an analysis on how the current crisis is being manipulated to increase government activity and jurisdiction. Ironically, the government pursuit of a solution for a problem we absolutely did not have (affordable housing) has led to a real-life problem that few can deny its impact and scope (the financial collapse). I commend Sowell's analogy of the current situation to the Depression era paradigm shift in the relationship of the state to its citizens. I implore readers to look at Sowell's argument, look at the testimony of history, and decide for themselves: Is the present environment more likely to fix what has been wrong, or to create a whole set of new wrongs? Sowell's book is a great first step in fighting the tragic conclusion that is the obvious answer to that question.

Two conclusions I think were that buyers should only buy homes within their actual means and lenders should use caution to not lend more than the borrower can afford. The third and most important is the role of the government to make a mess of things they don't understand or to enact BAD policy which led to the first two above.

This is one of the only Sowell works that I never got around to reading and I’m glad I finally did. It is definitely one of his most “underrated” books and has become one of my favorites - and another important work of his, as they all are. The negative comments here are quite laughable, and I thought I would address these negative comments as they could potentially mislead or deter future readers. Before I continue, I would like to make it clear that I'm not trying to offend, but simply intend to set the record straight. The top negative reviewer stated that Sowell never takes into account inflation when discussing the housing market. This is not true - apparently this book managed to reach well beyond economists or people with fundamental economic understanding and into the hands of many with no fundamental economic understanding whatever, because they do not seem to understand what “real terms” or "real income" means. Not only that, but Sowell explicitly uses the word “inflation” and “deflation” on multiple occasions and takes time periods and specific locations into consideration, compounded by the cost of the house as a ratio of the buyer’s income, not to mention a section dedicated to inflation on p. 86. Also, the fact that many negative reviewers seem to think it is absurd that restrictive land use and zoning laws don’t greatly influence the housing market? There is a massive difference between the level of zoning and restrictive land use laws in say, San Fransisco (or bay area in general) compared to Houston, which greatly impacts the market. If one studies urban economics or urban planning/development this is basic knowledge.It’s almost as if many people did not even read this book - either that or only read several pages and then set it down. I’ve noticed that those individuals seem unwilling to face facts, properly used statistics and empirical evidence when there is a trending “controversial” current event, and instead fall hard for political spin that satisfies their emotions. Much of what they find “controversial” regarding the economics of housing or even health care, shouldn’t be anymore “controversial” than other necessities such as clothing, food and water. Serious economic analysis is not a matter of opinion, and many of the same fundamental economic laws apply to these other resources that have alternative uses as well.That aside, this is an excellent analysis of not only the events leading to the “housing bust” of the late 2000s, but a great lesson on both the economics and politics of housing in general. This includes the incentives and constraints in which both private and public financial institutions operate, and how certain hybrid (private/public) federal financial regulatory agencies such as the HUD, FHA, CRA, Fannie Mae, Freddie Mac and Federal Reserve System are dangerous because they enable corruption known as “crony capitalism”, which essentially commits legalized extortion at the expense of private sector banks and finance & loan businesses, lining the pockets of special interests, corrupt politicians and the regulatory agencies themselves. The final chapter takes a look at how the New Deal of the 1930s is virtually a repeat of what happened in the late 2000s/early 2010s under the final months of the Bush administration and into the Obama administration, and how some of the regulatory agencies put into play during the New Deal era have allowed those with a vision for more government intervention to expand their powers by altering - or “reforming ” - the fabric of American society, once given the opportunity. Highly recommend.

The boom and bust in the US housing market has had enormous implications for the world economy as a whole so it is useful to have a grasp of what caused it, how we can avoid doing it again and how not to respond.The bust is easy to explain- house prices rises vastly exceeded gains in income, population or productivity so could not be sustained. A bust was inevitable, explaining the boom is the tricky part.Contrary to popular dogma the boom wasn't fueled by 'deregulation' or the free market but was brought into being by the government interventions- whether in restricting land use or coercing banks to drop lending standards.I won't attempt to rehash the entire book but Sowell looks at the impact of all the main players- the banks, the federal government, Fannie & Freddie and the regulators and explains how they each interacted to cause this failure. Unsurprisingly politicians come outparticularly badly.The book probably was rushed out by the publishers soon after the crisis came to a head in late 2008 and early 2009, hence the awkward lack of numbered end notes (there is a chapter by chapter list of sources but it is much harder to cross reference). However the analysis doesn't really suffer because Sowell has been writing about aspects of the crisis for years before the actual crash.

Sowell at his best!

Sowell at his usual best. Concise and rich.

It really is just not that complicated. Brilliantly explained.

Completely changed my perspective on this subject!