Archive | Housing

Reagan’s infamous speech in Philadelphia, Mississippi

In 1980, one of the major party presidential nominees opened his general election by delivering a speech in a small town in the Deep South that just by coincidence happened to be the national headquarters of the Ku Klux Klan. That same candidate had previously complained about federal housing policies which attempted “to inject black families into a white neighborhood just to create some sort of integration.” He argued that there was “nothing wrong with ethnic purity being maintained.” That candidate was President Jimmy Carter, the Democratic nominee.

Carter kicked off his general election campaign with a speech in Tuscumbia, Alabama. Although the Klan’s headquarters were located in that small town, Carter was not appealing to the Klan vote, but was instead hoping to win the votes of the more than 40,000 people who saw him speak at the town’s annual Labor Day fair. Perhaps Carter chose to start his general election campaign in rural Alabama because he recognized that Reagan might take away some of the southern states that had been crucial to Carter’s win in 1976. As things turned out, Carter was right to be concerned; he ended up losing Alabama by 1%.

After the Republicans nominated Ronald Reagan in Detroit in July, he gave his first post-convention speech in New Jersey, near the Statue of Liberty. While the informal opening date of the general election campaign is traditionally Labor Day, Reagan continued to campaign during August, and on August 3, 1980, spoke at the Neshoba County Fair in Mississippi. The Neshoba Fair is large and popular, which probably explains why Democratic Senator John Glenn campaigned there in 1983, when seeking the presidential nomination, and why Democratic presidential nominee Michael Dukakis spoke there during the 1988 general election campaign, shortly after being nominated by the Democratic Convention. [...]

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Why Small Business Isn’t Hiring

My Case Western colleague, Scott Shane, has a brief item linking the lack of hiring by small businesses to the collapse in home prices.  Specifically, he identifies five reasons the “residential real-estate mess” is holding back small business job creation:

  1. Declining house prices have softened demand for small businesses’ products and services.
  2. Small businesses are overrepresented in the real estate-related industries that have been decimated by the residential housing market collapse.
  3. Small business owners use their homes to obtain business credit.
  4. Banks have tightened lending standards in response to a rising share of non-performing real estate loans.
  5. Small business owners were major customers of residential real estate loans during the boom, making them among the consumers hardest hit from the collapse in home prices.

He concludes:

Waiting for small business owners to begin hiring in this economic recovery has become like waiting for Godot. Rather than continuing to wait (while chanting the mantra that “small businesses are the major job creators in economic recoveries”), we should acknowledge why small businesses aren’t leading job creation this time around and come up with solutions to the residential real estate problems that are holding them back.

Doing this is imperative. Slightly more than half (50.2 percent) the private sector works in small companies. If the residential real estate mess keeps the small business sector from hiring, it will be awfully difficult to reduce our unemployment rate to a reasonable level.

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Some Troubling Housing Market News from Abroad

While the U.S. and several other countries are in the throes of a housing recession/depression following the great bubble, housing markets in countries where the economy is still relatively sound–Australia, China, Canada–seem to still be in bubble mode. Indeed, word from my in-laws in Israel is that the housing market there, which wasn’t bubbly earlier in the decade, has gone rather crazy. For example, the value of my sister-in-law’s apartment in Ramat Gan has more than doubled in shekels over the last two years, and has approximately tripled in dollar terms since she bought it several years ago.

This suggests to me that despite Keynesian worries about inadequate government stimulus, there is in fact still far too much liquidity thrashing around the global economy. But I’m no economist, and would be interested to hear others’ views on how and why housing bubbles in other countries are coexisting with international economic recession and deflationary pressures. [...]

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FHA Slightly Tightens Loan Requirements

Instead of letting housing prices find the natural market-clearing price, many in the government have been supporting the efforts of those trying to reinflate the housing bubble.

The Federal Housing Authority (FHA) has been backing up to half of the mortgage market in some locales — allowing ridiculously low down payments of 3.5%, plus allowing the seller to provide closing costs up to 6% of the purchase price.

Now the FHA is slightly tightening loan requirements:

The Federal Housing Administration will announce more-stringent lending requirements and higher borrower fees on Wednesday to cushion against rising defaults and stave off the need for a taxpayer bailout of the agency.

The FHA, which has taken on a major role in the housing market during the economic downturn, doesn’t lend money to home buyers, but insures lenders against default on loans that meet FHA criteria. In exchange for that backing, borrowers who take out FHA-backed loans must pay an upfront insurance premium, currently set at 1.75% of the total loan amount. The premium can be rolled into the loan.

The FHA is set to raise that fee to 2.25%, the second increase in the past two years, according to people familiar with the matter. The value of the FHA’s reserves to cover losses has fallen to $3.6 billion, about 0.5% of the $685 billion in loans outstanding, down from 3% a year earlier. Congress requires the agency to maintain a 2% capital-reserve ratio. If the larger upfront fee had been in place last year, the FHA would have boosted its reserves by more than $1 billion.

Also to boost the reserve, the FHA will ask Congress to increase a separate insurance fee that borrowers pay annually, people said. If the agency were to run short of cash to cover projected losses, it

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More on California Tax-Services Model – William Voegeli Responds to Comments

Last week I blogged about a very interesting article in the Manhattan Institute’s City Journal by Claremont Review of Books contributing editor William Voegeli titled “The Big-Spending, High-Taxing, Lousy Services Paradigm” (Autumn 2009).  It compared the tax-services models of California and Texas.  VC commenters were spirited as ever and raised a number of important questions.

Although I haven’t had the pleasure of meeting William Voegeli, I took the liberty of contacting him through the Claremont Institute and asked if he might have any additional thoughts for us, particularly responding to VC commenters.  Mr. Voegeli was kind enough to say yes, and has sent along the following response, below.  Let me add, on behalf of the VC community, myself as well as readers and commenters, our great thanks for engaging with us.  And let me add to the VC commenting community, that in the spirit of the original article, you might call Volokh Conspiracy a … Low-Taxing, High-Services blog!  Mr. Voegeli:

Dear Prof. Anderson:

Thank you for bringing my City Journal article ( on California and Texas to the attention of the Volokh conspirators, and for your generous and thoughtful analysis ( of the piece.  Your post elicited many . . . spirited comments.  It would be cumbersome to address them individually, but I can offer a few points that speak to some of the general questions your readers brought up.

My essay argues that it’s not enough to look at how much states and localities spend because how well they spend is very important.  I understand several people in the comments section to be saying that this principle applies to the tax side of the equation, too.  Thus, California’s problem is not so much that it is a high-tax state but, as one commenter says, that

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Fannie Mae to rent out homes instead of foreclosing

AP reports on a new Fannie Mae program to allow homeowners who can’t pay their mortgages to rent instead:

Thousands of borrowers on the verge of foreclosure will soon have the option of renting their homes from Fannie Mae, under a policy announced Thursday.

The government-controlled company, through its new “Deed for Lease” program, will allow borrowers to transfer ownership to Fannie Mae and sign a one-year lease, with month-to-month extensions after that.

The program will “eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities,” Jay Ryan, a Fannie Mae vice president, said in a statement.

But the effort is likely to affect a relatively small number of homeowners. In the first half of the year, Fannie Mae took back about 1,200 properties through this process, known as a deed-in-lieu of foreclosure. That pales in comparison to the 57,000 foreclosed properties the company repossessed in the period. . . .

The rental program is designed to help homeowners who don’t qualify for a loan modification under the Obama administration’s plan, but still want to remain in their homes. . . .

Fannie Mae has hired an outside company, which officials declined to identify, to manage the properties.

In the Depression, when the government took over late or delinquent mortgages, many people just stopped paying because they knew that the federal government usually didn’t have the stomach to foreclose.

With its new rental program and Fannie Mae’s superb record of planning and management, what could possibly go wrong? [...]

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The California versus Texas Model, and Public Choice

William Voegeli, a contributing editor at The Claremont Review of Books, has an excellent essay in Manhattan Journal comparing the economic performance of California and Texas.  (I believe a short opinion page version appeared recently in the LAT.)  Among other things, the article provides a good example for how a public choice analysis can be applied to show, in this case, capture of public revenues and the process of increasing public revenues by public employees in California.

The most interesting feature of the article, however, is that it does not start out from a position of hostility toward California and its high tax model.  On the contrary, it says that there is a tradeoff that different people will make differently with respect to high tax/ high public services jurisdictions and low tax/ low public services jurisdictions.  There is a perfectly good argument for the former as well as for the latter.

It’s true that many people are less sensitive to taxes and more concerned about public goods, and these consumer-voters will congregate in places with extensive services. But it’s also true, all things being equal, that everyone would rather pay lower than higher taxes. The high-benefit, high-tax model can work, but only if the high taxes actually purchase high benefits—that is, public goods that far surpass the quality of those available to people who pay low taxes.

I grew up in California and despite my Upper Upper NW DC address, will always count myself a Californian, product of its public schools and a proud graduate of UCLA.  I was a beneficiary of the high tax/ high benefits model, and gravitate toward it.  The problem, as Voegeli documents, is two fold.  First, California is today a high tax/ low benefits model, while Texas, even with relatively low taxes, has managed remarkably [...]

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Peter Wallison on the Role of Government in Causing the Mortgage Crisis

In a recent post, I discussed how the Federal Housing Administration’s subsidization of dubious mortgage loans is repeating one of the key errors that helped cause the financial crisis of 2008. In this Wall Street Journal op ed, Peter Wallison (who presciently warned of the danger posed by these policies back in 2005) summarizes the evidence showing that the federal government played a decisive role in promoting the vast majority of the dubious mortgages involved in the mortgage crisis, which in turn helped cause the broader financial collapse:

When Fannie and Freddie were finally taken over by the government in 2008, more than 10 million subprime and other weak loans were either on their books or were in mortgage-backed securities they had guaranteed. An additional 4.5 million were guaranteed by the FHA and sold through Ginnie Mae before 2008, and a further 2.5 million loans were made under the rubric of the Community Reinvestment Act (CRA), which required insured banks to provide mortgage credit to home buyers who were at or below 80% of median income. Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.

Even some of the bad mortgages that were initiated by the private sector acting independently may have been influenced by Fannie and Freddie’s apparent willingness to purchase them at a later time should things go bad. Obviously, some private lenders and borrowers made mistakes of their own, and there were plenty of errors that cannot be blamed on the feds. However, absent the federal policy of promoting dubious mortgages and offering implicit government guarantees for them, the number of such mortgages would have been far smaller, and it is highly [...]

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Repeating the Mistakes of the Mortgage Crisis

The Federal Housing Administration seems intent on repeating one of the key policy errors that played a major role in causing last year’s financial crisis. One of the main causes of the mortgage crisis that led to the broader financial crisis of 2008 was government subsidization of risky mortgages for people who were unlikely to be able to pay them back if real estate prices fell. Investors bought up dubious mortgages supported by Fannie Mae and Freddie Mac because they correctly perceived these “government-sponsored entities” as having an “an implicit government guarantee.” See this account by Charles Calomiris and Peter Wallison. Wallison also presciently warned of the possible dangers back in 2005. Government backing for dubious mortgages was a bipartisan policy backed by many Republicans as well as Democrats. President Bush, for example, sought, in his words, to “use the mighty muscle of the federal government” to expand homeownership by giving GSEs incentives to ease credit requirements.

Unfortunately, policymakers have still not learned their lesson. As columnist Steve Chapman points out, the FHA is again subsidizing the same types of dubious mortgages that the federal government backed with disastrous results in the years leading up to 2008:

Watching Washington policymakers in action, I sometimes think they make mistakes because of unrealistic goals, flawed thinking, blind obedience to party, or dubious information. And sometimes I think they make mistakes because they are—how to put this?—clinically insane.

There is no other way to explain what is going on at the Federal Housing Administration, which provides federal guarantees for home mortgages. Given the collapse in real estate prices, the weak economy, and the epidemic of foreclosures, banks are acting with more caution than before. They now commonly require home buyers to make down payments of 20 percent to qualify for

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