Origin of the Housing Bubble: “The National Homeownership Strategy”
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More than 4 years into the collapse of the Housing Bubble much has been written and spoken on the subject. A Google search for “housing bubble” yields 1,110,000 results. Economists have debated why the event occurred. The media has covered its aftermath exhaustively. Politicians and bureaucrats have implemented the most aggressive public policy response since The Great Depression.
Genuine economic understanding has proven to be elusive.
A Google search for the term “national homeownership strategy” yields 9,040 results. Only a tiny percentage of these references are from recognizable media sources written in the past decade (estimated to be less than 5%). The overwhelming majority of listings are Government sources, library archives, catalogued books or dated materials.
A Historical Introduction
“In the Spring and Summer of 1994, Secretary Henry Cisneros met with leaders of major national organizations from the housing industry to solicit their views about establishing a national homeownership partnership.”
- HUD, "Partners in the American Dream", May 1995
“In 1994, at the President’s request, the U.S. Department of Housing and Urban Development (HUD) began work to develop a National Homeownership Strategy with the goal of lifting the overall homeownership rate to 67.5 percent by the end of the year 2000. While the most tangible goal of the National Homeownership Strategy was to raise the overall homeownership rate, in presenting the strategy HUD pointed explicitly to declines in homeownership rates among low-income, young, and minority households as motivation for these efforts.” - U.S. Department of Housing and Urban Development Office of Policy Development and Research website
"At the request of President Clinton, HUD is working with dozens of national leaders in government and the housing industry to implement the National Homeownership Strategy, an unprecedented public-private partnership to increase homeownership to a record-high level over the next 6 years.” - Urban Policy Brief Number 2, August 1995
“Federal institutions, policies, and programs alone cannot meet President Clinton's goal of record-high levels of homeownership within the next 6 years. HUD has forged a nationwide partnership that will draw on the resources and creativity of lenders, builders, real estate professionals, community-based nonprofit organizations, consumer groups, State and local governments and housing finance agencies, and many others in a cooperative, multifaceted campaign to create ownership opportunities” - The National Homeownership Strategy
The Housing Bubble’s Rosetta Stone
The National Homeownership Strategy (NHS) may have been the most comprehensive, pervasive, impactful and transformational public policy initiative in U.S. history. Yet only a small percentage of Americans have ever heard of it. Even fewer understand the NHS’ stated goal of record homeownership or are able to confirm whether those objectives were met.
Results from a recent AMD.com survey confirm this unfamiliarity: Link to Survey Results
The NHS was a massive, complex, coordinated undertaking.
The public policy initiative consisted of 100 distinct action items detailed within “The National Homeownership Strategy: Partners in the American Dream” released by HUD in May 1995. Specific examples of these action items include the following subject titles:
Action 11: Removing Barriers to Mortgage Financing for Starter Homes
Action 29: Alternative Approaches to Homebuying Transactions
Action 35: Home Mortgage Loan-to-Value Flexibility
Action 36: Subsidies to Reduce Downpayment and Mortgage Costs
Action 44: Flexible Mortgage Underwriting Criteria
Action 45: Public-Private Leveraging for Affordable Home Financing
The NHS’ integrated effort included alliances with influential public, private and non-profit entities. At the time of publication in 1995 there were 56 “National Partnerships” including the American Bankers Association, Appraisal Institute, Fannie Mae, Federal Home Loan Bank System, Freddie Mac, Mortgage Bankers Association of America, Mortgage Insurance Companies of America, National Association of Home Builders, National Association of Real Estate Brokers, National Foundation of Consumer Credit, National Urban League and HUD.
More broadly The National Homeownership Strategy encompassed parallel regulatory and legislative reforms during 1994 and 1995. Examples include:
- The Community Reinvestment Act (CRA) was revised to force lenders to make loans to uncreditworthy borrowers as a cost of doing business
- The Riegle-Neal Act was passed making compliance with The Community Reinvestment Act a prerequisite for banks to expand, make acquisitions or operate in more than one state
These initiatives transformed the purpose of bank regulators. Since The Great Depression the goal of bank regulation had been to ensure the solvency of lending institutions. After 1994 regulators were tasked also with implementing and enforcing the NHS’ social agenda. Extending loan access to the uncreditworthy was in direct opposition to bank solvency.
Under the NHS the considerable resources of the Federal Government were brought to bear on expanding homeownership. In 1994 HUD directed Fannie Mae and Freddie Mac to proliferate subprime lending. These combined Government Sponsored Entities (GSEs) act as a functional monopoly within the mortgage market. As such, they enjoyed substantial influence over lending standards, credit availability and the private-sector mortgage industry which was directly dependent upon the GSE’s for profitability. By 1996, HUD was directing Freddie and Fannie to provide at least 42% of their mortgage financing to low-income borrowers and 12% of their portfolios to “special affordable” loans.
The Homeownership Bubble
The effect of the NHS’ coordinated effort was to dramatically increase access to credit and demand for houses. Upon implementation homeownership accelerated in historic fashion. This record pace of gains would continue almost linearly through the entirety of the Housing Bubble.
The speed and abruptness of these concocted homeownership gains was extraordinary in the context of an enormous, national housing market defined by glacial trends. The market reaction to the NHS was even more spectacular given the relative stability of homeownership rates over the prior 35 years.
The National Homeownership Strategy achieved its stated goal of lifting homeownership rates from 63.8% in 1994 to 67.5% by the end of 2000. In six years the NHS accomplished the most extraordinary expansion of homeownership in U.S. history eclipsing the previous record of 65.8%.
Link to a graphical analysis of The Homeownership Bubble.
Prelude to a Housing Price Bubble
Loosened lending standards, increased access to credit and a massive reallocation of capital dramatically expanded demand for houses. As would be expected anytime demand grows faster than supply creating relative scarcity, prices started to rise.
Housing appreciation began to steadily accelerate in 1997, two years after the NHS originated a Homeownership Bubble, and continued at an unsustainable pace through the entirety of the Housing Price Bubble.
The historical evidence is compelling. While the NHS achieved its objective of record homeownership gains, in doing so it also originated a housing price bubble which distorted economic activity for a decade and ultimately caused the ongoing Affordable Mortgage Depression.
Link to graphical analysis of The Housing Price Bubble.
The National Homeownership Strategy:
- Was the most transformational housing public policy in U.S. history
- Originated the largest asset price and credit bubbles in human history by:
- Overtly manufacturing The Homeownership Bubble
- Inadvertently creating The Housing Price Bubble
- Massively distorted national investment, saving and consumption behavior
- Distorted capital flows
- Dramatically increased the level of debt capitalizing housing
- Unsustainably bloated federal, state and local government spending
- Is directly responsible for the most damaging economic downturn since The Great Depression
And only a small fraction of Americans have ever heard of it.
Rationale, Expectations and The Law of Unintended Consequences
“This unprecedented public-private partnership is founded on a deeply rooted and almost universally held belief that homeownership provides important advantages that merit continued public support. The National Homeownership Strategy cites four fundamental benefits:” Urban Policy Brief Number 2, August 1995
- "Homeownership enables people to have greater control and exercise more responsibility over their living environment."
- "Homeownership helps stabilize neighborhoods and strengthen communities."
- "Homeownership helps generate jobs and stimulate economic growth."
TheAffordableMortgageDepression.com observes that the net effect of The National Homeownership Strategy was to:
- Create overvalued and overleveraged housing assets that are falling in value and undermining financial security
- Encourage people to behave irresponsibility and undermine control over living environments
- Destabilize neighborhoods and weaken the communities dependent upon them
- Destroy jobs and disrupt economic growth
The Affordable Mortgage Depression
Blog’s original subtitle:
“The Housing Bubble and an impending "Affordable Mortgage Depression" are the result of government intervention intended to realize a social agenda. Legislation distorted market forces and the economic incentives of mortgage lenders and home buyers. Affordable Mortgages, necessary for subprime borrowers to access homeownership, decoupled housing prices from the fundamentals of value. The unwinding of these economic distortions will result in a Global Depression.”
While these observations grossly oversimplify the economic phenomena of the last 15 years, one cannot fluently understand The Housing Bubble, its collapse, current economic conditions, formulate an adequate response, or identify inevitable events to come without understanding the origin of the economic distortion.
The conditions which enabled The Housing Bubble to develop and persist were established in 1994 and 1995. Much of what transpired afterwards, especially post September 11th, is secondary to understanding why the decade-long economic distortion developed. Many of these later events were vital to perpetuating prices but largely inevitable, resulting from a primordial environment established years earlier. Mania-era developments allowed prices to continue to decouple from the fundamentals of value, and provided the Housing Bubble with a widely recognizable face, memorable characters, story-lines, heroes, villains and a narrative for the history books. (paragraph revised 3/15/10 for the sake of improved clarity)
But the prerequisites necessary to understand The Housing Bubble and its aftermath are contained within its origin. Without knowledge of these pervasive forces and the distortions which they inevitably wrought it is not possible to fully understand what is transpiring within the economy or correctly prescribe an effective course of action to assuage the downturn. This is the tragic flaw of our Government’s response to the Housing Collapse since 2007 and the reason that this blog exists.