Friday, December 5, 2008

Fundamental Origins of the Housing Boom and Bust

Professor Larry White says it was pro-housing regulatory and lending policy. Professor William Black said that Corporate CEO's had bad incentives.

I say that it might have been the anticipation of technological or taste change that did not materialize as quickly as we thought. I don't think the high and rising housing prices, and the fairly stable housing rental rates, are consistent with either Professor White's or Professor Black's theory.

We'll see what Professor DeLong has to say.

By the weekend, you will be able to read all four essays here.


Steve Sailer said...

It's extremely important to realize that the Housing Bubble and Mortgage Meltdown did not happen everywhere in America. For instance, North Dakota had no housing bubble, and thus its economy is still flourishing. If you look at foreclosures, you can divide up the Mortgage Meltdown into three general categories: Greater Detroit, Miscellaneous, and the four "Sand States" (California, Nevada, Arizona, and Florida). The last category is by far the most devastating. As of August 2008, those four Sand States accounted for 50% of all foreclosures and, due to higher homes prices (especially in California), the great majority of defaulted mortgage dollars. California, by itself, probably accounts for about half of all the mortgage dollars lost so far.

Let's apply your general analysis to the heart of the Mortgage Meltdown, the Sand States. The Housing Bubble there was essentially a bet that rapid Hispanicization of the population was compatible with extremely high home prices. This meant, in effect, that either Hispanics could earn enough money to pay off these huge mortgages or that they could find Greater Fools willing to pay even more money to live amidst ever increasing numbers of Hispanics.

As we can see now, neither assumption has proven valid. Home prices in California are dropping like a stone back to levels at which the increasingly Latino population might possibly be able to afford.

Steve Sailer said...

That raises the question of why skepticism about the inability of the heavily Hispanic populations of the four Sand States to pay off huge mortgages did not result in resistance by lenders. The answer is obvious: skepticism about minorities is politically incorrect.

In fact, it's punishable in court of law. Say a financial executive had sent his colleagues an email saying: "Why are we writing so many no money down half million dollar mortgages in California? Isn't California full of Mexicans? How can Mexicans pay off these huge mortgages? Or who wants to pay even more money in the future to send their kids to schools full of Mexicans?" The email would have come up in the discovery process of an anti-discrimination lawsuit and the financial institution would have fired the writer of the email and would have promised the National Council of La Raza that they would write even bigger zero down mortgages in Mexican neighborhoods.