Will Obama Cause Another Bubble?

“The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit,” says the Washington Post, and some people fear that will lead to another housing bubble. In fact, there are going to be more housing bubbles; the Obama administration is contributing to them; but not through policies promoting subprime lending.

Neither subprime lending nor other federal policies caused the housing crisis that led to the 2008 financial crisis. Too few people understand this because they still view U.S. housing as a single market. But unlike labor or food or cars, housing is not something that you can easily pick up and move to somewhere that may place a higher value on it. Oil can be easily and fairly cheaply transported, so there is a world oil market; but housing markets are strictly local.

Nearly eight years ago, Alan Greenspan famously said the United States was not suffering from a housing bubble. He has take a lot of heat for that, but he was right. His exact words were, “Although a ‘bubble’ in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels.”

WHere he went wrong was when he added, “Although we certainly cannot rule out home price declines, especially in some local markets, these declines, were they to occur, likely would not have substantial macroeconomic implications.” The reason he and so many others misjudged the markets is that, in the past, the rises and falls of local housing markets have not been synchronized, and so a fall in one tended to be offset by a rise in another.

But during the mid-2000s, the fall of the “frothy” markets were nearly synchronized, and I think the reason for this is that this was the first time so many markets were subject to the land-use regulation that increased market volatility. The rapid rise in housing prices in so many markets led far more speculators to jump in, especially after the dot-com crash, and that infusion of money made the markets act more closely together.

As the Antiplanner has noted before, if subprime lending had caused a national housing bubble, you would have seen bubbles in places like Dallas, Houston, Indianapolis, and Raleigh–places that had no bubbles even though they were growing much faster than regions that did bubble. The difference between frothy California and flat Texas is that one had land-use regulation that artificially restricted housing supply while the other did not.

I estimate that about 45 percent of American housing was under land-use restrictions that contributed to the 2006 housing bubbles. This was a huge increase from the 1970s, when only about 10 percent of U.S. housing bubbled, and the 1980s, when less than 20 percent of housing bubbled (and not all simultaneously).

If the Obama administration has its way, next time it will be closer to 90 percent. The administration’s sustainable communities partnership would like to see all metropolitan areas do the kind of land-use restrictions that led to three housing bubbles in California and Hawaii, two in Massachusetts, Oregon, and Washington, and one in Florida. This program, not subprime lending, will make the next financial crisis even worse than the last one.

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8 thoughts on “Will Obama Cause Another Bubble?

  1. LazyReader

    Both parties pushed for bigger and bigger government in the housing market. They both rallied behind Freddie and Fannie and both of parties continue to ignore personal and economic freedom. You think that’s bad wait til all 50 states have land and housing regulations. Historically shrewd banks and responsible people simply haggled until they found a common ground. People wanted a descent deal with good rates, banks wanted their money back but this equilibrium. But politicians interfered with the process when they declared to make “Homeownership the American Dream” by convincing freddie and fannie to buy up more home loans and forcing banks to give more to minorities or poorer people with bad credit. Typically banks would ask for a down payment or check their credit. Politicians were cheerleaders for Fannie/Freddie finding them sound. Now the homeowners who probably shouldn’t be homeowners are the first wave of casualties.

  2. Chauncy

    The FL housing bust had nothing to do with land use regulations and everything to do with overbuilding. No reason to fret though, the housing market will recover as inventory is absorbed and all those half-completed subdivisions will get built out. This is why there is affordable housing in FL and not CA or MA where the planners want to choke out the market in the name of “sustainable communities”. Obama’s policy is bound to fail because all he cares about is placating radical environmentalists.

  3. Craigh

    As the Antiplanner has noted before, if subprime lending had caused a national housing bubble, you would have seen bubbles in places like Dallas, Houston, Indianapolis, and Raleigh–places that had no bubbles even though they were growing much faster than regions that did bubble. The difference between frothy California and flat Texas is that one had land-use regulation that artificially restricted housing supply while the other did not.

    That’s an excellent point and certainly played a part — an important part — in the housing bubble. But you mustn’t dismiss the enablers: the Community Reinvestment Act which jawboned banks into accepting sub-par loans and the Federal Reserve which made massive amounts of cheap credit available.

    They all played a part in the bubble. And, by all means, don’t forget Fannie Mae which Congress ordered to buy the sub-par mortgages that CRA and HUD had ordered be made. We can, I suppose, quibble over which of the above was most important in forming the bubble, but absent even one of the conditions, it probably wouldn’t have been blown.

  4. LazyReader

    Bill Clinton repealed the Glass-Steagall Act on his way out the door, allowing Wall Street banks to bet against mortgage re-payments (credit-default swaps). This is like allowing people to burn down their own homes to collect on their fire insurance. Actually it’s worse, it’s like allowing a crack heads addicted to money to? burn down other people’s houses in order to collect on the fire insurance. Bill Clinton modified the CRA to make it more aggressive at the? end of his term. Government mandates insisted that banks make risky? loans- it was CRA(Community Reinvestment Act) that Bill Clinton pushed forward that put pressure on banks to make bad loans. And when you push people into thinking they can have good credit when they don’t, it’s a carrot in front of their noses “Cheap Credit”. Individuals are just as responsible as the government. The government guaranteed sub prime loans, thus removing the element of risk. These loans would not otherwise? have been made.

  5. bennett

    Oh guys! You know better. Around here we can’t take into account all the variables that contributed to the housing bubble. We have to find one single aspect, preferably one in which city planners are the prime target, and say “This is what did it!”

    If we take all the aspects into account we may find something that is at odds our ideological assumptions, and we can’t have that.

  6. Matt Young

    I looked at housing production and sales by volume, not price. I saw the housing market performing quite well during and up to crash, never a real surplus or deficit in inventory. The problem with housing was the price.

    Building houses is energy intensive, I figured about half of the price rise was energy related.

  7. LazyReader

    I was wondering, does the Antiplanner have any comprehensive data regarding European transit. Subways, trolleys, regional rail in regards to it’s costs, operating expenses, subsidies. It’s great he talks about America’s transit follies, but remember it draws it’s “inspiration” from it’s European constituents. Such as the RER which serves the entire Paris region.

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