Members of Our Government Are Propogating Self-Serving Lies

I am neither a Republican nor a Democrat. I revile the political class and despise the bloated Federal Government which both parties have created for their own enrichment. That said, I find myself especially disgusted by a self-serving fiction currently being manufactured by the Democrats in defiance of reality and the facts. Even worse, this fantasy is being used to attack the freedoms and economic system that made the United States the envy of the World.

Neither capitalism, nor George Bush, nor tax cuts caused our economic calamity. Congress created the Housing Bubble while pursuing the politically expedient, but disastrously misguided social agenda of increased homeownership for minorities and the poor during the 1990s. By overtly manipulating the lending industry, Congress proactively extended mortgage availability to people with poor credit, little capital and insufficient cash flow. It was a recipe for creating an inevitable economic disaster.

Today the uninformed and the politically expedient, including our current President, are weaving a self-serving narrative that bluntly ignores the facts. One can not attribute responsibility for the Housing Bubble without understanding what actually caused the crisis. The first order of business in making such a determination is to assess when the Housing Bubble actually began. The data necessary to isolate the economic distortions that contributed to the Housing Bubble are readily available.

While a detailed analysis of the predictable and inevitable excesses of capitalism during the latter years of the mania is interesting, an analysis of the root cause of the phenomenon is necessary to gain a real understanding of the Housing Bubble.

The Relevant Questions:

Why did subprime lending become so prominent?

When did subprime lending become material, begin to grow and why?

When did homeownership rates start to climb rapidly and set all-time records?

When did housing prices in bubble cities begin to appreciate more rapidly than inflation, more rapidly than the rate of income growth and begin to consistently accelerate?

For 30 years preceding the Housing Bubble homeownership rates had fluctuated within a band of 2% ranging between 63.5% and 65.5%. From 1985 through 1993 there was little variation in homeownership rates with the exception of annual seasonality.

The conclusion is simple. The U.S. economy structurally supports sustainable homeownership rates of approximately 64% to 65%.

So what happened in 1994 that caused homeownership rates to skyrocket from 64% to 69% over an 11 year period? Was it evil President Bush who was sworn into office in 2001? Was it his evil tax cuts for the rich? Was it even a bumbling Alan Greenspan who slashed interest rates during 2001? I attribute fault to both Bush and Greenspan, but the fact is that the Housing Bubble began in the early 1990s and was 7 years old by the time Bush became President. So if it wasn’t the soulless Republicans and greedy investment bankers who caused it, what did?

In 1994 the government began to aggressively implement social policy designed to provide mortgage availability to people who could not access homeownership which dramatically altered the market forces and inevitably influenced prices.

Congress through revisions to the Community Reinvestment Act forced lenders to make loans to uncreditworthy borrowers, minorities and in inner-cities. Congress further and inappropriately used its influence over the supposedly independent GSEs, Fannie Mae and Freddie Mac, to proliferate subprime lending. Fannie and Freddie were and are functional monopolies within the mortgage market. Any major lender or mortgage originator must have a relationship with the GSEs and is dependent upon Fannie and Freddie to exist and succeed. When Fannie and Freddie require lenders to make subprime loans, even when unprofitable to do so, lenders engaged in the activity as a cost of doing business.

By 1996, HUD was directing Freddie and Fannie to provide at least 42% of their mortgage financing to borrowers with income below the median in their area. In addition, HUD required Freddie and Fannie to provide 12% of their portfolio to “special affordable” loans. Those are loans to borrowers with less than 60% of their area’s median income. These government-directed expenditures represented a huge sum of money allocated to subprime lending and presented an extraordinary profit opportunity to mortgage originators with fee-based revenue models.

With artificially increased availability of and demand for mortgages, housing prices began to rise.

Unsustainable, inflation-adjusted housing appreciation began around 1996, accelerated consistently and persisted until 2005.

The housing industry is a slow moving market. Price moves lag changes in market conditions, sales volumes and other price determining forces. Sales volumes and homeownership rates had been rising for two years before prices started to move dramatically. This lag closely parallels what we have seen since the peak in 1995. Sales transaction volumes crashed in 2005 and 2006 but house prices didn’t begin to collapse until the end of 2007 and 2008.

The Case-Shiller Home Price Index and Annualized Appreciation charts above demonstrate that prices began to rise broadly and unsustainably on an inflation-adjusted basis in 1997.

Any genuine analysis of national housing appreciation rates or of most local markets which defined the Housing Bubble definitively demonstrates that the phenomenon manifested itself between 1994 and 1997. National and city-specific prices began to rise during this period after having stagnated for years. Price appreciation began to outpace inflation and accelerated uniformly until the Housing Bubble hit the wall in 2005 and 2006.

Those individuals who focus solely on the abuses and excesses at the tail-end of the Housing Bubble are missing the point. Analysis of the mania-portion of the bubble ignores the forces that created it. Those people who want to blame free-markets or capitalism for our woes are misguided.

Capitalism and the free markets do not operate with an agenda. They simply exist within and react to the environment. The United States consists of hundreds of millions of self-interested individuals and companies making trillions of daily decisions about how best to utilize scare time, capital and resources. And in doing so our economy as a whole functions as efficiently as any system ever has. There is nothing immoral or nefarious about this process and it doesn’t inevitably lead to the excesses we witnessed during the mania.

The immoral, abusive and excessive activities were predictable given the environment that the Government created within the housing industry. The Housing Bubble was not created by capitalism, greed, President Bush or tax cuts but was in fact the inevitable result of efforts to achieve a social agenda through government manipulation within the economy.

Sadly, the Democrats are being allowed to divert responsibility for our Global Economic Depression to the free-markets as a justification for even greater government intervention, regulation and manipulation. It is once again inevitable that the result will be disastrous.