The Housing Boom and Bust by Thomas Sowell

Thomas Sowell's new book titled The Housing Boom and Bust sheds light on the origins of the recent financial crisis. If you are open to considering that government intervention in the housing market may actually create more problems than it solves, this is the book for you.

Sowell begins his argument by showing that a variety of local land-use restrictions are at the root of high housing costs, which he points out aren't truly a national problem. Even so, those higher costs lead to calls for federal government intervention, ignoring the fact that often government policies (at a local level) were largely to blame for unaffordable housing in the first place.

Sowell then shows how the resulting federal affordable housing policies, championed by both Democrats and Republicans, pressured banks and other lending institutions to loosen their lending standards so more people could participate in the "dream of homeownership." Whether these people could reasonably afford to repay their loans was for the most part ignored as the resulting speculative housing bubble grew and grew.

A few excerpts to pique your interest:

The decade of the 1970s saw a rapid spread of laws and policies in California severely restricting the use of land. Often these laws and policies forbade the building of anything on vast areas of land, in the name of preserving “open space,” “saving farmland,” “protecting the environment,” “historical preservation” and other politically attractive slogans. Moreover, these restrictions were extended to more and more land over the years....

While California was different from most of the rest of the country in the extent and severity of its land use restrictions, it was not unique. The same kinds of land-use restrictions...spread through various other places around the country... But, in whatever years building restrictions were tightened in various localities, those were usually the same years in which housing prices skyrocketed....

When the political crusade for affordable housing took off and built up steam during the 1990s, the share of their incomes that Americans were spending on housing in 1998 was 17 percent, compared to 30 percent in the early 1980s. Even during the housing boom of 2005, the median home took just 22 percent of the median American income....

Statistical studies about disparities between blacks and whites in mortgage loan approval rates might be said to have “jump-started” the housing crusades that began in the 1990s. Politicians and the media led this crusade, with many community activists following in their wake, much like scavengers, able to extract large sums of money from banks and other institutions by raising claims of discrimination, whose power to delay government approval of bank mergers and other business decisions made pay-offs to these activists the only prudent course for those accused....

When you open the floodgates, you cannot tell the water where to go. Housing speculators — “flippers” — found the new and looser home mortgage rules a bonanza. So did many others. It is by no means clear that the poor or minorities came out ahead at all, after the housing boom turned to bust and many were left with mortgage payments they couldn’t meet on homes they couldn’t afford.

If you want to understand the recent housing bubble, Sowell's new book is definitely a worthy read. Still not convinced? Take a look at this recent review at Kiplingers.com.

Note: I also recommend Irrational Exuberance by Robert Shiller, which I blogged about earlier this year.