Real Estate

The government is largely responsible for the real estate boom and bust.

The government wants a blank check for welfare and warfare spending. They tax some of it, some of it they borrow, and the rest they inflate by lending easy credit.

The government wanted everybody to own their own home. So they created Fannie Mae and Freddie Mac. They gave them government support, easy credit, tax incentives, and power. Not surprisingly, these two institutions did not behave responsibily with the money they didn't earn and weren't accountable for. They created bad loans and told banks, lenders, and brokers to go out and sell them. The banks, lenders, and brokers of the world knew an easy dollar when they saw one, and they knew that if they didn't sell the loans, their competitors would. So they sold them. Unqualified borrowers, seeing potentially the only opportunity they would ever get to buy the house they always dreamed of, took the loans.

But reality catches up. The whole thing was built on a house of cards. The money wasn't real. The loans were bad. The master returned and demanded an accounting. No one had the money to pay up.

The problem is not greed. Everyone is greedy. Borrowers, lenders, and governments. Greed does not cause a person to take risky behavior. There are as many greedy misers as venture capitalists. The problem with the housing market bust was risk. Risk is not the foregone conclusion of greed. In this case, Fannie Mae and Freddie Mac engaged in risky behavior because the money was not theirs, and they were insulated from negative consequences.

When you have to work for the money that you lend, you are much more likely to lend it conservatively. When you get it at ridiculously low interest rates from the government, you are more likely to lend it recklessly.

http://mises.org/story/3053
http://mises.org/story/3045
http://mises.org/story/2936
http://www.townhall.com/columnists/ThomasSowell/2008/07/22/bankrupt_exploiters
http://www.townhall.com/columnists/ThomasSowell/2008/07/23/bankrupt_exploiters_part_ii

The problem with our current situation is that no one is willing to accept the solution. Let the market crash. Make lenders earn the money they lend. If you want to buy a home, you will only be able to buy a home that is 100 - 150% of your annual income, you will need at least 6 months of reserves, you will need a 20% downpayment. If you don't have savings, you rent. If you don't make enough money, you rent. If you live in a bad neighborhood where banks are unwilling to risk their investment, you rent. It's cold. It's slow. It's not modern. It's uncaring. It's sensible. No one will ever support it.