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The Housing Boom and Bust

A number of books have been written about the recent real estate crash over the last months. I’ve found Thomas Sowell’s The Housing Boom and Bust to be among the best.


Dr Sowell attributes much of the crisis to the well meaning politicians who misinterpret the meaning behind the data. They assume that any differences in mortgage approval rates between races must be due to racism and calls for correction. Instead of digging through the data to truly understand the origin of these differences, they seek to legislate equality with disastrous results. The Community Reinvestment Act (CRA) at its surface may have seemed to have the best of intentions, to provide affordable housing and improve home ownership rates among minorities. Unfortunately, good intentions didn’t lead to good results.

Let’s first take a step back and look at how the statistics are misunderstood. My undergrad is a BSEE (Bachelor of Science, Electrical Engineering), the number of women in my class and in the engineering school overall was about 15%. Does this need to be ‘fixed’ and if so, how? The immediate fix would be to change the acceptance criteria so all women that apply get admitted, or at least as many as it takes to get to 50/50. You can see how this is nonsense. For the long term, one can present fields of study in an interesting way and let the students decide. Can you change the interest of an entire gender? My data is 25 years old, and I suspect that the percent of women engineers has risen but not to the point of equality. This is a bit of a tangent, the truth behind the statistics, one I’ll bring up again in future posts.

An article in SmartMoney last November titled The Color of Money, spoke about the difference observed in wealth vs income among races, white households having a median net worth of $118,300 in 2004 vs black household’s $11,800. Even after normalizing for income, the wealth accumulation was higher for whites at the same income level as their black or Hispanic counterpart. The article didn’t go into the home ownership implications as it was pretty brief, instead focusing on retirement issues, but this observation sets the stage for some of the conclusions Dr Sowell’s book reaches.

The difference in mortgage approval rates can be viewed two ways, one study showing a denial rate for whites was 11% vs blacks 17%, ‘nearly 60% higher denial rate.’ When we look at the same data and state that the white approval rate was 91% vs blacks 83%, ‘less than a 10% disparity,’ the picture seems a bit different. What the CRA did was to encourage the banks to change the rules of lending, discarding much of what we learned in Mortgage 101. It wasn’t simply that house prices rose too high, as even in in 2005, the median house took just 22% of median income to afford, a number consistent with having housing cost 25% or less of one’s income. It was the introduction of subprime loans including those of the ‘no money down’ variety becoming the norm in many areas. This combined with the various adjustable rate products were the proposed solutions to a problem that didn’t exist. It doesn’t take a math genius to calculate the monthly payments required for an option ARM (paying interest only at a low teaser rate) and a fully amortizing higher rate loan a few years later. These products were the equivalent of financial time bombs.

This book is brief, only 148 pages, but an excellent read. The author, Thomas Sowell, is not a journalist with an agenda to promote, currently a Senior Fellow at the Hoover Institution, Stanford University, he has a respectable resume as a professor and author.


  • Financial Samurai November 17, 2009, 9:10 am

    It really feels like real estate is BOOMING again. Prices in China, Singapore, Taiwan, and Hong Kong for example are at new record highs. Even our Canadian brothers are experiencing record prices (see the canadian fin blog).

    Here in San Francisco, things are humming a long. The boom wasn’t as big b/c things are so expensive here to begin with. But, I’m impressed to see volume pick back quite readily!

    How about in your area Joe?

  • Dave November 17, 2009, 9:35 am

    Krugman has been asserting for a while that CRA’s role in the subprime meltdown has been greatly exaggerated. He points to a Federal Reserve study that found only the vast majority (90%+) of subprime loans came from institutions not subject to the CRA.

    Federal Reserve speech about the CRA study:

  • Credit Card Chaser November 17, 2009, 8:05 pm

    I will have to check that book out very soon as I am already a big fan of Thomas Sowell.

  • JOE November 17, 2009, 10:18 pm

    I am in a town 20 minutes west of Boston. We didn’t go up as much during the boom or come down as hard. Similar to what you commented.

  • JOE November 17, 2009, 10:29 pm

    Good links, much appreciated. I was offering a book summary, not my own view, which is that there were many factors, and CRA was just one of them.

  • John November 18, 2009, 7:40 am

    The housing market in Northern VA(30-40 miles south of DC) is hurting. I know because I bought my house for $400k in 2004. With the recent low interest rates I tried to refinance just this month. Unfortunately the house only appraised for $323k. Now I have no problem continuing to pay my mortgage, but I would have been able to get under 5% had it appraised for at least $360k(we owe $372k). Everyone else’s foreclosure’s is now taking money out of my pocket in more ways then one.

  • Augustine November 19, 2009, 10:41 am

    Krugman is wrong in stating that subprime defaults was an exagerated factor in the bust. What he refuses to acknowledge that the housing bubble was about to pop. He can’t do that because he’s got a Nobel prize for advocating the easy credit that spawned the housing bubble. In his mind, there’s no simpler way to prosperity than government debt and printing money. Except that Brazil, Argentina and Zimbabwe are not counted among the developed nations after experimenting with such “bright” idea…

  • JOE November 19, 2009, 12:37 pm

    I appreciate the comment. The example I used was a tangent to the book discussion, and I tried to show just what you suggest, that change is slow. I appreciate your 20%, but that’s up from my 15% over a 25 year period, kind of slow. Is the number growing to flatten out at 50% or some lower number? What would the impact be if the government told schools that all classes had to have spaces assigned 50/50? The how and why of home ownership goes far deeper than the book or I can cover, but if we agree that change is slow, then we likely agree that trying to effect a change with instant impact can lead to unintended consequences.

  • Elle November 19, 2009, 12:02 pm

    Joe, not to focus overly on engineering and women, but more to propose you maybe are missing the boat on some sociological phenomena: Has it occurred to you to ask why women’s proportion of engineering undergraduates has risen from close to 0% in the 1960s to around 20% nationwide (on average) today? The proportion of women getting undergraduate degrees and degrees in law, medicine and engineering, and those participating in the corresponding professions, have all skyrocketed compared to several decades ago. Consider again the experiences of Justices Ruth Bader Ginsburg and Sandra Day O’Connor; and former Attorney General Janet Reno (to name three celebrity figures) in law school and as attorneys (well Justice Ginsburg would point out she would only be hired as a Legal Secretary after she graduated valedictorian from Columbia Law School). Compare to what women in law school and the legal profession report today. Of course the interests of an entire gender can change.

    My take: Sociology is a science. But sociology’s problems and implemented solutions are not as easy–not as black and white, for one–as those in engineering. I think it takes a different mindset to deal with sociologic problems; a mindset that recognizes that social change is slow, and that in fact history has often proved the value of social change, even if the “only” value is less hatred and less genocide. Though I prefer the glass half full view that a healthier, more harmonious society, with talent drawn from all possible sources, increases the value of my stocks.

  • JOE November 19, 2009, 2:05 pm

    I didn’t mean that (the interests of an entire gender cannot change) at all. Sometimes I have difficulty getting my thoughts in writing. I start with the premise that women are as smart as men. My engineering data was a 4 year observation. 15%. I didn’t do a deep dive into the reasons the number was low, just observed that change couldn’t be instant whether or not the goal was realistic. You are citing a 50 year trend. I am telling you that if the government in 1960 declared a 50/50 goal effective immediately, there would have been a problem. You continue to support my position (that change can’t be legislated for an immediate impact) yet claim we disagree.

    I chose this example to show how a disparity in populations, whether by race or gender, don’t always imply sexism or racism. Are we not in nearly complete agreement?

  • Elle November 19, 2009, 1:21 pm

    Joe, there is a phenomenon in sociology called “critical mass” that argues that, if the numbers of a minority (in this case, females in engineering) are under 20%, then the minority will suffer more discrimination than if the number were say 30%. This is talked about in sociology literature. One example: The U.S. Coast Guard Academy upped its female proportion to 30% about a decade ago (dunno exactly why or how), and USCGA women’s attrition rate dropped dramatically, in fact to levels comparable to men’s. Plus you are still ignoring the dramatic increase of women’s undergraduate representation over a decade or so from the 1960s to the 1980s.

    My bone to pick is your seeming contention that the interests of an entire gender cannot change. History shows indisputably you are mistaken. If you do not like the female example, take a look at the numbers for male nurses(!). They have been way on the increase as well. It is much more socially acceptable to become a male nurse, and this is in no small part because more and more people actually receive treatment from male nurses and see it as possible and realistic.

    Imagine how you would be advising Jane V. 2 in the 1960s versus how you advise her today.

    I do not think 50-50 representation in any of the main professions or in undergrad is the goal. The goal, societal-wise, is to get as many talented people in economically meaningful jobs as possible. Without eliminating discriminatory trends, this will not happen. (By discriminatory trends, I mean conduct that is not based on merit that tends to drive good people out.) One way to cleanse the workplace or engineering college campus of discriminatory trends is simply to increase the affected minority’s numbers above critical mass. This can be done without lowering standards.

  • JOE November 19, 2009, 9:02 pm

    I am smiling, Elle. You took a tangent and really ran with it. 50/50 is close to the population split, not quite, but close. And to your point, it’s meaningless. Just as the variations in loan approval rates did not point to racism, and were not something to be fixed. I think things change, and we agree, slowly. If the mortgage studies understood what Thomas Sowell understood, along with the Smart Money article I cited, the problem, if one existed, would have been addressed quite differently.

  • Elle November 19, 2009, 8:06 pm

    This alleged 50/50 goal seems to me to be of your invention. I do not know any organization or institution that has such a goal for women in undergraduate majors or in the professions. (The elephant in the room for me BTW is the fact that I believe women now make up around 60% of all undergraduate majors. I believe I have read affirmative action for males is in place at some universities. Diversity goals and all.)

    I am citing a roughly 15-year or so trend, regarding women being something under I believe 1% in engineering to some 15%. Women’s proportion grew much more quickly (achieving critical mass much sooner) in non-engineering professions. For your education. 😉

    So I trust you do agree the career interests of an entire gender can change significantly. This is the point I wanted clarified. ‘Because it sure sounded like you were not a believer in this fact of history. Smile!

  • JOE November 19, 2009, 10:36 pm

    I’m inclined to avoid analogies at all costs. I’d have been better off citing data that showed that black people had a default rate no higher or lower than whites which goes to show that the approval rates were just. Had their default rates been lower, it would imply a higher standard. On the other hand, Asians do show a higher approval rate than white people, also cited by the book’s author, yet not by the press.

  • Augustine November 19, 2009, 10:16 pm

    Rather, the elephant in the room is why is this discussion lopsided about the imbalance of women in engineering. How about the imbalance of men in nursing, teaching, social services, etc? Instead, the humongous elephant in the room is that men and women are different and they have different inclinations, in spite of the same intellectual capacity and potential for achievements. We’d be in better shape by accepting the different talents of both genders instead of whining about the few women in engineering and natural sciences when they have an overwhelming presence in medicine and social sciences.

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