There is general agreement the financial crisis that began with the failure of
Lehman Brothers on September 15, 2008, was worsened by the bursting of the U.S.
housing price bubble. It is also generally acknowledged that some of the fuel for the
housing bubble came from a relaxation of mortgage loan standards that allowed
many families to purchase homes they could not afford with loans on which they
subsequently defaulted.
Executive Summary
There is general agreement the financial crisis that began with the
failure of Lehman Brothers on September 15, 2008, was worsened
by the bursting of the U.S. housing price bubble. It is also generally
acknowledged that some of the fuel for the housing bubble came from
a relaxation of mortgage loan standards that allowed many families
to purchase homes they could not afford with loans on which they
subsequently defaulted. New and excessive demand from mortgagees
drove up home prices faster than the increase in the housing supply.
It is less well understood that the U.S. housing bubble was not a
monolithic event. It varied substantially by geography. Gross national
house value increases and losses were overwhelmingly concentrated
in metropolitan areas with more restrictive land use regulations —
known by a variety of names, such as compact city policy, growth
management or smart growth. Many metropolitan areas with these land
use restrictions were not able to respond to the increased demand for
homeownership caused by the greater availability of mortgage credit.
The inevitable result was higher prices, which encouraged speculation
and increased house prices even more. Thus, from 2000 to 2007,
among the nation’s 50 largest metropolitan markets:
■ In the 10 markets with the greatest rise in prices compared to
income, the cost of a house rose by an average of $275,000,
relative to incomes.
■ Among the second 10 markets with the greatest price escalation,
house prices rose $135,000.
■ By contrast, in the major markets with the least rise in prices,
houses increased only $5,000.
the U.S. housing stock rose $5.3 trillion relative to
household incomes. It is estimated that $4.4 trillion of
this increase occurred in the 20 major markets with
the greatest escalation in housing prices.
For the nation as a whole, house values more than
doubled from 1999 to the peak of the bubble. From
the peak in the fourth quarter of 2006 until the end of
2010, homes values fell more than $6 trillion. Losses
after the bubble burst were even more concentrated
than house price gains. Consider:
■ From the peak of the bubble in 2006 to the
Lehman Brothers’ collapse on September 15,
2008, more heavily regulated metropolitan
markets accounted for 73 percent of aggregate
value losses.
■ The average loss from 2007 to the Lehman
Brothers’ collapse was $175,000 per house in the
11 markets with the greatest run-up in prices and
the greatest fall.
■ All prescriptively regulated markets (more heavily
regulated markets) accounted for 94 percent of
losses, or an average of $97,000 per house.
■ Responsively regulated markets (less restrictively
regulated markets) lost just 6 percent of their
value, or an average of $12,000 per house.
With prices falling and mortgage interest rates
rising, households were no longer able to refinance,
causing many new homeowners to fall into
delinquency and foreclosure.
If the prescriptively regulated metropolitan areas
had instead had responsive land use regulations, prices
likely would have escalated at a much lower rate
during the housing bubble. This is because the land
price premiums that grew during the bubble would
have been less likely to develop, at least to the same
degree. If the housing markets in the prescriptively
regulated markets had replicated the performance of
the responsive markets, it is estimated that the house
value losses from the peak of the bubble to the start
of the financial crisis would have been $0.62 trillion,
one-fourth of the actual loss of $2.44 trillion. The
average loss per house would have been $17,000
instead of $67,000. These more modest losses might
not have set off the financial crisis, or it might have
been less severe.
http://www.ncpa.org/pdfs/st335.pdf
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