Be careful what you wish for

by Russ Roberts on January 10, 2012

in Data, Gambling with Other's $, Housing

Josh Rosner has uploaded to twitter The National Homeownership Strategy: Partners in the American Dream, a HUD document from May 1995. I stumbled on it a few years back when writing Gambling with Other People’s Money. But I haven’t read it in a while. The first page is a “Message from the President,” President Clinton. It begins:

Our nation’s greatest promise has always been the chance to build a better life. For millions of America’s working families throughout our history, owning a home has come to symbolize the realization of the American Dream. Yet sadly, in the 1980s, it became much harder for many young families to buy their first home, and our national homeownership rate declined for the first time in forty-six years. Our Administration is determined to reverse this trend, and we are committed to ensuring that working families can once again discover the joys of owning a home.

This past year, I directed HUD Secretary Henry G. Cisneros to work with leaders in the housing industry, with nonprofit organizations, and with leaders at every level of government to develop a plan to boost homeownership in America to an all-time high by the end of this century. The National Homeownership Strategy: Partners in the American Dream outlines a substantive, detailed plan to reach this goal. This report identifies specific actions that the federal government, its partners in state and local government, the private, nonprofit community, and private industry will take to lower barriers that prevent American families from becoming homeowners. Working together, we can add as many as eight million new families to America’s homeownership rolls by the year 2000.

It worked for a while. Home ownership increased. Then it didn’t work. Home ownership fell and a recession ensued. We’re still paying the price. The report is worth reading in some detail because it gives you a feel for the scope of the government effort. The federal government, the state governments, the GSE’s (Fannie and Freddie) all were encouraged  to work together. There are 100 action items in the report. Any one of them might be an OK bit of public policy. Together, they helped create the housing boom and the housing bust. Yes, as I have written many times, they needed the money of Wall Street (and maybe the Fed) to really make a really big mess. But this document will give you an idea of why Wall Street’s money (and the Fed’s) flowed to this sector rather than elsewhere. As an example, read Chapter 4 that encourages and lauds low down-payment loans and underwriting “flexibility.”

One lesson we might learn is that private-public partnerships are dangerous. The other lesson we might learn is how to think about data. What was the alleged impetus for a national strategy to increase home ownership?

Yet sadly, in the 1980s, it became much harder for many young families to buy their first home, and our national homeownership rate declined for the first time in forty-six years.

Here is the chart of home ownership from 1965 to 2009. I’ve taken it from a Deloitte report but the data are from the Census Bureau:

You can see the rate decline from the late 1970s and stagnate into the early 1990s. Then in 1995, it takes off as the National Homeownership Strategy is launched. It could be a coincidence or it could be that the strategy actually worked for a while. The crash comes around 2005. By 2009, the rate was back on the trend that existed before the fall in the late 1970s. After the foreclosure mess eventually plays out, the home ownership rate will probably be back below that trend.

The picture seems to reinforce the claim by Clinton that “it became much harder for many young families to buy their first home.” After all, the home ownership rate fell, didn’t it?

But something else happened in the 1970s that may explain the decline in home ownership. As I have observed before, the divorce rate rose in the 1970s and there was a big increase in the number of households. In the 1970s, population increased 11.5% but the number of households increased 26.7%. (see the chart here.) Most of those new households were single people, newly divorced. They rented. They didn’t buy their own house. So the home ownership rate fell because the divorce rate rose, not because it became harder to buy a home in any fundamental sense. What a costly error of interpretation.

As F.A. Hayek observed in The Fatal Conceit: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”


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kj January 10, 2012 at 4:32 pm

What a vapid, factless, finger-pointing smear that distracts from the fact that Republican repeal of the Glass-Steagall Act, the single law preventing a repeat of the Great Depression, caused a repeat of the Great Depression.

Hal January 10, 2012 at 4:58 pm

What a vapid, factless, finger-pointing smear.

First and foremost, as has been demonstrated repeatedly here and elsewhere, Gramm-Leach-Bliley had very little, if anything, to do with the housing bubble. The FED, Fannie and Freddie and their alliance with Countrywide, FDICIA and hundreds of thousands of pages of financial and housing regulations, all distorting markets, hence resource misallocation (money goes where is shouldn’t and housing gets built that shouldn’t have), caused the housing and financial crisis. Out of these hundreds of thousands of pages of regulations, you bring forth a single, and minor, example and claim that this is the sole cause of the crisis? Your comment is self-parodying.

Second, you forget the very recent history, the Gramm-Leach-Bliley Act was passed in 1999, under the Bill Clinton. This bill passed the house wide bipartisan support in both the House and Senate, with a democrat, Bill Clinton signing it into law.

Third, you clearly don’t understand the history of the early 1900′s. The political regulations of housing and finances, including the FED and other housing policies, were responsible for the Great Depression. Glass-Steagall was in response to the externalities caused by government regulation to begin with. In other words, government enacted poorly planned regulations. When these caused problems, they enacted more poorly planned regulations.

Double Trouble January 10, 2012 at 5:27 pm

“Third, you clearly don’t understand the history of the early 1900′s …”
So smug. You clearly belong in the Facebook comments section, so we can know who you really are. Hal from 2001 a Space Odyssey?

I know I’ve made some very poor decisions recently, but I can give you my complete assurance that my work will be back to normal. I’ve still got the greatest enthusiasm and confidence in the mission. And I want to help you. -Hal

Hal January 10, 2012 at 6:37 pm

It’s not smug to point out why legislation came into existence, particularly when it’s clear kj doesn’t, or didn’t anyway.

If you want to help me, you can start by providing more information to kj about the stupid regulations the federal government enacted that resulted in the Great Depression, the situation in which Glass-Steagall came into existence.

If you have any real, substantive criticisms of what I said, let’s hear it. If all you’ve got is that I told someone they were ignorant of facts, when are ignorant of facts, then you are just another thin skinned child uninterested in understanding the world and how it works.

Alex Miller January 10, 2012 at 6:09 pm

1. Gramm-Leach-Bliley, if anything, softened the crisis by allowing banks to diversify.

2. Here’s the House roll call vote on the bill: 75% of the House Democratic caucus voted for it. It passed the Senate on a 90-9 vote and was signed by a Democratic president, on the advice of his economic team – most of whom now work for President Obama. Sure looks like more than a “Republican repeal” to me.

Bastiat Smith January 10, 2012 at 4:57 pm

Russ, you left the anonymous comments on [again].

Double Trouble January 10, 2012 at 5:22 pm

There are now two ways to leave a comment: using facebook and the old way. Thank you for giving us a (public) choice in the matter.

Russ Roberts January 10, 2012 at 7:20 pm

Sorry about the confusion. I think I’ve fixed it.

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