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Source link: http://archive.mises.org/10248/75-years-of-housing-fascism/

75 Years of Housing Fascism

July 9, 2009 by

In terms of the unforeseeable and destructive effects of government regulation, it’s difficult to find a better example of a time bomb: it was set in 1934 to explode in $147 billion (about $239 billion in 2008 dollars) of damage 55 years later.[8] Then, to top it all off, the free market received the blame! While the establishment Left is certainly horrible on the issue of housing, the Right has its own shameful legacy as well. FULL ARTICLE

{ 15 comments }

David K. Meller July 9, 2009 at 10:49 am

While the information about Bob Taft in this article is most disappointing, we are far better knowing the truth about the history of housing (and mortgage) regulation and nationalization in our country. This mess was far too large and destructive to be the fault of only one political party, Both democratic socialists (liberals) and democratic fascists (conservatives) must have played important roles in different times.

The housing fascism of the past century was the result of badly flawed ideas. Fortunately, we are now in a growing position to replace those with far better free market, private property, laissez faire ideas. Articles like this pave the way.

PEACE AND FREEDOM!!
David K. Meller

PS–the late Ayn Rand once remarked “if you hear bad collectivist notions the chances are very good that the author was a liberal. If, on the other hand, you hear something godawfully, horrible in its collectivism, chances are very good that the author is a conservative.” A good thought for today. DKM

greg July 9, 2009 at 12:38 pm

The current housing problem is not simply not a product of housing changes in the 1930′s. The banking industry would have evolved close to the direction it has with or without the FHA.

During the 1980′s, financing was provided to builders and developers who were not only licensed, but had to show a good track record in building. They had to prove that they could find property, build a quality house and be able to sell it with a fair profit. During the construction period, builders had to prove that they could manage the loan to insure they could come in within their projected budget. It was important to the banks that the builder could sell the house in a timely manner, even if the builder could afford to carry the loan. It was a business about turning inventory.

Then in the 1990′s banks relaxed their standards and allowed new builders to obtain construction loans with no proven track record. Many banks would even loan to owner builders that were not licensed to build their own homes, basically taking on the risk in order to generate more loans. The cost of poor construction management, quality and liens did not outweigh the benefits of generating loans.

Also in the 1990′s banks began reducing their direct employee overhead by outsourcing loans to mortgage brokers. These brokers were paid on the total dollar amount of the loans they processed and turned over to the banks of their choice. It was in their best interest to present the best package to the banks to insure the loan would go through. This led many brokers to falsify information in order to make the loan work and get paid for the transaction.

Seeing how well the outsourcing of the loan officer’s duties worked, banks began to outsource other tasks. Construction progress inspections, once performed by the department manager, were turned over to private inspection companies that were paid on the number of inspections. It wasn’t long before these inspectors trusted the builders to tell them the level of completion which allowed the inspectors to turn in reports that they did not physically inspect.

Banks knew the abuse in the system was present, but felt the risk was worth the savings generated by reducing head count and departmental expenses. After all, they were going to sell these loans anyway and they would not be their problem. And those that they kept, they would force the borrowers to pay for mortgage insurance to cover them in case of default. They felt secure and never dreamed the insurance provider would go under.

Led by the availability of financing options, the number of small builders and developers exploded in the late 90′s and early 2000′s. Suppliers and subcontractors expanded to meet their needs, lumber yards that gave builder discounts, started to extend these discounts to everyone. Feeling the pressure to reduce prices further, many lumber yards formed buying groups that allowed them to discount their products further. Sub contractors took the same path, selling their services to all customers across the board at the same price for everyone. Soon, builders lost any price advantage over the average person buying products and services.

The housing boom during the early 2000′s evolved into a large number of participants buying up property and resources to the point they began to make stupid choices, buying marginal pieces of property, building too large of homes on marginal lots, running up cost on products that did not yield a positive return and paid inflated prices for subcontractor services. Builders could afford to make mistakes because there were buyers for their products.

During the same period, ETF’s and REIT’s came on the market allowing investors to trade the real estate market without taking delivery of the actual home or land. Real estate became a commodity like oil or corn. But unlike other commodities, investors flocked to real estate because they did not see any downside to their investment, resulting in everyone taking long positions. People were even writing construction contracts and selling them upon completion of the home for a nice gain. All of this demand on the buy side pushed the real estate market well beyond the normal supply and demand levels.

Then the real estate market started to turn and like any other commodity traded in Chicago or New York, the prices started to fall. And like other commodities, few profited from the downturn and the majority of people lost. During the boom the investment exchanges looking for new markets to generate revenue forced people who needed to buy a home for shelter to pay higher prices and now are in part responsible for forcing people to sell at huge discounts.

Realtors had benefited from the active real estate market as people flocked to them to handle the buy and sell transactions. In a hot market, people were willing to pay their high commission rates because of the huge appreciation they were seeing in their real estate investment. But now the appreciation has turned to depreciation and people are taking a very serious look at the excessive commissions Realtors charge. And now, people interested in having a house built will not go to a Realtor knowing that their cost will be added to the price of their home contract. A 6% commission could make the difference in them making money or not.

Today, the housing market has collapsed and is sitting on the bottom of the downtrend. A recovery is slowly forming as demand is returning to the market. Housing starts are now at a 530,000 annualized units per year which is nowhere near the amount of units required to meet the demand for the growing population and the number of units lost per year to destruction. When this demand finally returns to the market, we should see some stabilization and upward movement in housing prices. And demand will grow more for new construction, but there are fewer builders left in the market to service this demand.

gene July 9, 2009 at 2:23 pm

Excellent article and also an excellent summary of recent events by greg.

We can never have a “healthy” housing market without free interest rates, it just can’t happen. The “artificial” rate will always interfere with supply and demand and the market will never truly be able to stabilize.

The fact that the right or the left would have any concern over “owned” housing just points out that corruption is involved. They are profiting from any increase in home ownership.

The is no “social” reason to promote home ownership, although there is certainly “social” reason to eliminate “homelessness”. That the government can convince its citizens that home ownership is the be all, end all, is a commendable job of marketing, and that is exactly “all” it is.

All the government has done in the housing market is artificially bloat prices to astronomical levels, geometrically increase debt and enriched banks and lenders.

Americans as a whole, own a far smaller “percentage” of their home than any time historically. Whatever we choose to believe, the vast majority of us are “renters”, we have simply replaced renting the “house”, with renting the money!

TechFall July 9, 2009 at 2:38 pm

Don’t forget other incentives that drove the housing consumer. Consumers of home ownership were given tax deductions for not only their real estate taxes, but interest paid as well. Federal tax code has historically provided an incentive to taxpayers to pursue debt over savings. Consumer debt interest became non-deductible about 20 years ago, but the mortgage & real estate tax deduction has remained inviolate.

Homeowners understood the tax consequences very quickly. The simple solution was re-financing the house to cover consumer debt so the interest became tax-deductible. This use of the house as an ATM is no small part of the financial crisis which unfolded.

Changing our tax policy to a straight percentage of income earned with no deductions would be a good start toward allowing market price equilibrium to take place in Real Estate. Unfortunately, the government seems to feel its role is to push us in other directions.

gene July 9, 2009 at 2:43 pm

good point!

and, the interesting detail is that any “tax advantage” to home ownership quickly becomes capitalized into the price. So, the banks and lenders profit from the tax deduction as borrowers qualify for larger principals which boosts housing prices.

if we removed any government intervention, including outrageous permit fees, into housing right now, prices would probably drop to half of the current value.

Ohhh Henry July 9, 2009 at 4:33 pm

Unfortunately, the government seems to feel its role is to push us in other directions.

As Hans Hermann Hoppe has explained, this is because government’s essential role in the scheme of things is to produce “bads” not “goods”. And due to the way that power is distributed a democratic government will inevitably produce bads more assiduously than any other form of government.

greg July 9, 2009 at 4:47 pm

People buying and owning houses to live in is not the problem today. The problem is people buying homes to flip and money that poured into REITs that in turn purchased real estate to sell after holding for a brief period.

This gross over speculation that treated real estate like any other commodity caused the prices to spike and when these people started to sell short, the prices fell. The people that were left holding the bag was the people that bought a home to live in.

Most of our problem started and grew when the CBOE and the NYMEX went from not for profit to a publicly held for profit organizations. To increase profits, they simply invented ETF’s and other funds that had to purchase or sell the underlying commodity. Unfortunately, real estate was an area of expansion.

And like any commodity investment, 5% are winners and 95% loose!

TechFall July 9, 2009 at 4:55 pm

I would further suggest that any party issuing a loan be required to hold it for 50% of the term. These ‘wonder boys’ of Wall Street have created more harm than good with their derivative financial instruments. Mortgage documents signed at 10:00AM and sold by 2:00PM may appear to be a market-driven exercise but this perception of instant liquidity created momentum that drove us over the abyss.

Michael Milken created a huge market of corporate junk bonds that bubbled out in the ’90s. What we’ve witnessed recently with CDOs et.al. are only repeating patterns of past events.

Attempts to create future markets on current assets through derivative exercises can only benefit arbitrageurs whose time is better spent digging ditches or being otherwise spent as productive members of a society.

Imagine a society where human capital is consistently applied toward productive results. I consider employment opportunities at H&R Block to be more a consequence of bad public policy than a market opportunity being served.

End the Fed July 9, 2009 at 5:51 pm

“The problem is people buying homes to flip and money that poured into REITs that in turn purchased real estate to sell after holding for a brief period.”

Solution: don’t buy from flippers unless they charge a fair price. If you think you’re gonna quickly resell it for even more, then YOU’RE the flipper.

“This gross over speculation that treated real estate like any other commodity”

It IS like any other commodity.

“caused the prices to spike and when these people started to sell short, the prices fell.”

Solution: don’t buy at an inflated price. Because for anybody to “sell short”, someone else has to buy at the inflated price.

“To increase profits, they simply invented ETF’s and other funds that had to purchase or sell the underlying commodity.”

Solution: don’t trade ETF’s.

End the Fed July 9, 2009 at 6:02 pm

“I would further suggest that any party issuing a loan be required to hold it for 50% of the term.”

Why? If someone wants to buy that loan, you’re going to stop them “for their own good”?

“These ‘wonder boys’ of Wall Street have created more harm than good with their derivative financial instruments.”

No, they haven’t.

“Mortgage documents signed at 10:00AM and sold by 2:00PM may appear to be a market-driven exercise but this perception of instant liquidity created momentum that drove us over the abyss.”

And a free market would put people who made losing trades out of business.

“Michael Milken created a huge market of corporate junk bonds that bubbled out in the ’90s. What we’ve witnessed recently with CDOs et.al. are only repeating patterns of past events.”

Then don’t trade corporate junk bonds.

“Attempts to create future markets on current assets through derivative exercises can only benefit arbitrageurs whose time is better spent digging ditches or being otherwise spent as productive members of a society.”

Arbitrage is extremely useful in balancing supply and demand. If you have two prices, that means resources are misallocated, and arbitrage helps allocate them properly.

“Imagine a society where human capital is consistently applied toward productive results.”

Who gets to determine what’s “productive” and what isn’t? What’s productive for you can be unproductive to me. Just ask the government. But free trade means trade is only done when it’s productive for both sides. And if someone makes an unproductive trade anyway, they end up with less influence to make future trades.

“I consider employment opportunities at H&R Block to be more a consequence of bad public policy than a market opportunity being served.”

And of course, H&R Block generates no productive result (other than minimizing the amount stolen by the government).

TechFall July 9, 2009 at 9:34 pm

You: Why? If someone wants to buy that loan, you’re going to stop them “for their own good”?
Me: Not for their own good, but for the good of the economy. The problem was mortgage brokers artificially inflated real estate prices by not caring what the consequences of their actions were as ownership of the paper changed hands. No banker in their right mind would issue the mortgages given to sub-prime borrowers if there wasn’t a market for that risk downstream. They got their vig and didn’t care. Pure capitalism, maybe, but it created a huge problem when an avalanche of defaults occurred. One solution is to make sure both parties to the transaction have some skin in the game. Limiting bankers to banking is a good idea, imho.

You: No, they haven’t.
Me: I can’t comment to the lack of an argument except maybe: “Yes they have”.

You: And a free market would put people who made losing trades out of business.
Me: Oh sure, the financial institutions who created and promoted the MBS & CDO mess went out of business. In a perfect world, yes, but what planet do you live on?

You: Then don’t trade corporate junk bonds.
Me: my point is there is a repeating pattern here, from S&L crisis, to Junk Bonds, to Dot.com bust, to sub-prime bust. These ‘sophisticated’ market makers just end up taking advantage of gullible/greedy investors. I suppose Madoff and Stanford were just exercising their right to participate in a market. You seem to be saying ‘caveat emptor’ is the only rule allowable in the marketplace.

You: Arbitrage is extremely useful in balancing supply and demand. If you have two prices, that means resources are misallocated, and arbitrage helps allocate them properly.
Me: in a pure open market where people understand their risks I would agree. This certainly wasn’t the case in the sub-prime market mess where these instruments were universally given AAA rating by the ‘trusted’ standard-bearers.

You: Who gets to determine what’s “productive” and what isn’t? What’s productive for you can be unproductive to me. Just ask the government. But free trade means trade is only done when it’s productive for both sides. And if someone makes an unproductive trade anyway, they end up with less influence to make future trades.
Me: Simple tax (progressive if you must) based on income: no deductions for anything. Fire all of the lawyers, accountants and IRS employees dedicated to the ridiculously complex tax code in this country. Adam Smith’s invisible hand will drive them to make a more useful contribution to society. Make them take spin classes hooked to generators until they find good work.

You: And of course, H&R Block generates no productive result (other than minimizing the amount stolen by the government).
Me: and this gets to my main point. I try to understand theory, place it in context and try to translate it to practical solutions. I’m sure the Marxists of the previous century turn had plenty of purists who would easily have substituted capitalist for government in your last parenthetical.

gene July 9, 2009 at 9:57 pm

good arguments on both sides, but none hold any water in an economic system that is funded with make believe money, directed to “selected” traders, sold at artificially low interest rates and when the bottom falls out, the taxpayer is bleed for his “real”, hard earned dollars.
most all of the economic oddities you guys are referring to are nurtured by suppressed interest rates. The mortgage back security itself cannot survive in a high interest environment [bankers will keep high interest loans or will want more for them and mortgage holders refinance high interest mortgages causing a loss on the balance sheet of the MBS.
sorting out the problems is very difficult when the foundation of the system, the money supply, is fictitious. this, of course, affects housing very profoundly.

End the Fed July 10, 2009 at 2:53 pm

If you buy or sell derivatives without understanding what they are, then YOU are the speculator.

“But they’re so complicated that nobody can understand them”: then don’t buy them until you figure it out. If you buy them anyway, you are a speculator.

Robin White July 11, 2009 at 12:39 am

“The problem was mortgage brokers artificially inflated real estate prices by not caring what the consequences of their actions were as ownership of the paper changed hands.” Now, the mortgage brokers are even getting blamed for price inflation! I’d like to know how they would go about doing that.

Manny July 11, 2009 at 12:03 pm

The current housing problem is not simply not a product of housing changes in the 1930′s.

Not sure what you’re trying to say with the double negative, greg. “[N]ot simply not” means “simply.” I seriously doubt you meant that! LOL!

The banking industry would have evolved close to the direction it has with or without the FHA.

Again, I think you mean “without the FHA.” The author cited the Fed and “other factors” with regard to the mortgage debacle. As far as “banking industry,” that’s another issue.

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