Taxpayer-Subsidized Housing Booms and Busts: You’re Paying to Prop Up My Home Value, While Yours Collapses

In Washington, D.C., the region where I live, massive federal spending on government workers and contractors props up home values. My small, 60-year-old two-bedroom home, purchased in 2004 for over $400,000, is still worth over $500,000 even after the housing bubble popped elsewhere in the country. But in many other parts of the country, housing prices have simply collapsed after the end of the housing bubble.  Software engineer Clayton Cramer (who is also a frequently-cited historian of gun regulations) discusses just how cheap homes have become in Idaho, listing houses:

Like this 4 bedroom, 3 bath, 2070 sq. ft. home in Salmon, Idaho, for $59,000. That’s not a down payment. That’s the full price.

Or this $24,000, 3 bedroom, 1 bath, 809 sq. ft. house in Osburn, Idaho.  (Yes, that’s near the entrance to Yellowstone.)

Or this $36,900, 3 bedroom, 2 bath, 1296 sq. ft. house in Coeur d’Alene, Idaho.

Cramer writes about the role of speculation, some of it government-facilitated, in causing the housing bubble, and a recent Washington Post story on the subject:

Researchers with the Federal Reserve Bank of New York found that investors who used low-down-payment, subprime credit to purchase multiple residential properties helped inflate home prices . . . Investors defaulted in large numbers after home values began to drop in 2006. They accounted for more than 25 percent of seriously delinquent mortgage balances nationwide. . .  Foreclosures skyrocketed as people couldn’t or refused to pay their underwater mortgages. Residential construction also languished, putting hundreds of construction workers in the hardest-hit states out of work.

As Cramer chronicles, “Here in Idaho, there were realtors renting buses to take California investors around, some of whom were buying 30-40 houses purely on speculation that they would continue to rise in value–not even trying to rent them out. It was very short-term thinking, with disastrous results for everyone. So why were they doing it? As the article points out, quoting from the head of the Las Vegas real estate trade group:

Paul Bell, president of the real estate association, said amateur investors were behind the soaring home values seen during the first half of the last decade, but noted those buyers were simply taking advantage of how easy it was to buy homes at the time because of questionable lending practices and government pressure on banks to promote home ownership.

“There was blame to go around for everybody,” Bell said.

Fortunately for me, I live in an area, metropolitan Washington, where the housing bubble is temporarily propped up by a government-spending bubble. In 2008, Obama promised a “net spending cut,” but as soon as he was elected, he pushed through massive spending increases. So for the time being, my home is worth more than I paid for it. But my good fortune (at taxpayers’ expense) may not go on forever. Eventually, the orgy of deficit-financed government spending on government programs and employees is going to have to give way to paying the skyrocketing cost of servicing  America’s exploding national debt.  Interest rates on government bonds will inevitably rise in America, as they already have in Spain, Italy, Greece, Portugal, and France. And when they do, government spending will be diverted away from government programs (and the people they employ inside the Beltway) and towards America’s foreign and domestic creditors, like the Chinese bondholders who have purchased so much of America’s national debt.  The hundreds of billions in “stimulus” spending that has enriched so many inside the Beltway will shrink the economy in the long run. Even the Congressional Budget Office, which claimed that the stimulus would help in the short run, admitted that the stimulus package will actually shrink the economy over the long run, by exploding the national debt and crowding out private investment.

Earlier, we wrote about how Clinton Administration pressure to promote affordable housing contributed to the mortgage crisis. The liberal Village Voice previously chronicled how Clinton administration HUD Secretary Andrew Cuomo helped spawn the mortgage crisis through his pressure on lenders to promote affordable housing and diversity. “Andrew Cuomo, the youngest Housing and Urban Development secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country’s current crisis. He took actions that — in combination with many other factors — helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments.  He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded ‘kickbacks’ to brokers that have fueled the sale of overpriced and unsupportable loans. Three to four million families are now facing foreclosure, and Cuomo is one of the reasons why.” (See Wayne Barrett, “Andrew Cuomo and Fannie and Freddie: How the Youngest Housing and Urban Development Secretary in History Gave Birth to the Mortgage Crisis,” Village Voice, August 5, 2008.) Politically-correct government officials like the Boston Fed claimed that traditional lending criteria, such as requiring a downpayment, were obsolete and merely served to thwart expanded homeownership and minority access to credit.

The Obama administration is currently forcing banks to make risky loans in the name of “fair lending,” potentially planting the seeds of a future financial crisis.  The administration opposed banks basing lending decisions on traditional lending criteria like credit scores, which tend to be higher among white applicants than black applicants. Assistant Attorney General Thomas Perez argues that bankers who do so are engaged in a “form of discrimination and bigotry” as serious as “cross-burning.” Perez has compared bankers to “Klansmen,” and extracted settlements from banks “setting aside prime-rate mortgages for low-income blacks and Hispanics with blemished credit,” treating welfare “as valid income in mortgage applications” and providing “favorable interest rates and down-payment assistance for minority borrowers with weak credit,” according to Investors Business Daily.

Banks have long been under pressure from liberal lawmakers to make loans to low-income and minority borrowers. For example, “a high-ranking Democrat telephoned executives and screamed at them to purchase more loans from low-income borrowers,” The New York Times reported.