Housing Crisis: Who’s to Blame?

In a recent article in National Review, Thomas Sowell disects the national housing & credit conundrum astutely. His theme is that, while most analysts point at overzealous builders, lenders, real estate professionals, etc. as the source of our current predicament, we may be overlooking an important, if not THE primary player responsible: government.

Sowell makes the astute observation that it isn’t enough simply to observe that housing prices skyrocketed and that sub-prime and other “creative” lending products resulted in a high-risk lending environment that has since largely collapsed. Rather, we should at least consider what circumstances led to those actions in the marketplace, if we are to avoid repeating our mistakes in the future. The original source of the problem, according to Sowell, is state and local governments that “…have in various parts of the country so severely restricted building as to lead to skyrocketing housing prices, which in turn have led many people to resort to ‘creative financing’ in order to buy these artificially more expensive homes.”

There you have it. For years the Home Builders Association has strongly argued that the biggest impedement to housing affordability was not land, labor and materials pricing (though all experienced substantial increases when demand was high). Rather, the fastest growing portion of the cost of a new home is regulatory and governmental costs. There is the problem of large fees. There is the problem of the accumulated effect of much smaller ones. There is the issue of the hidden cost of unnecessary regulation and bureacracy. There are compliance costs. There is the affect that regulatory and governmental costs have on the other cost components of a new home (land, labor, materials).

And lest you think the HBA is the only authority concerned about the impact of regulation and govermental fees on affordability, no less an authority than the U.S. Department of Housing and Urban Development cited regulatory costs and fees as the single largest and fastest growing financial barrier to affordable housing in the U.S. And that was back in 2005. HUD was right. Prophetic, in fact. It was precisely these regulatory costs and fees that drove the price of housing out of reach for the average family. It was these regulatory costs and fees that forced builders to charge more for their homes while making less. And it was these regulatory costs and fees that ultimately drove some lenders to seek out more “creative” ways to help these families realize the American Dream of Homeownership.

Ronald Reagan once said: “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

It is an election year. Various parts of the county are in various degrees of crisis with regard to housing and credit. Politicians are quick to point fingers and offer their own proposed solutions. While their ideas for resolving the problems are welcome, we must not forget where the problem originated. At its core, this is not a housing crisis. It is not a credit crisis. This is an affordability crisis that has largely been caused by the insatiable appetites of local, state, and federal governments.

It has been said that government is like a baby: An alimentary canal with a big appetite at one end and no sense of responsibility at the other. If we want to address the current economic condition of the housing market in a lasting way, we must curb that baby’s appetite while helping create a new sense of responsibility.