Economics, Regulation

This chart shows why Romney is right to want to eliminate HUD

If you knew nothing about U.S. economic policy over the past decade or so, looking at this chart from the St. Louis Fed would certainly give you the idea that Washington did something to a) make housing more affordable to low-income households and b) to boost housing prices (and thus the incomes of low-income households). As the bank notes, “It is important to remember that low-income households are more likely to have extracted home equity by using non-traditional mortgages and home-equity lines of credit, which would also explain the disparity across income groups.” A bit more:

Continuing problems in the U.S. housing market are a significant concern for the ongoing economic recovery. The drop in U.S. home prices since their peak in 2006 caused household wealth to decline by around $7 trillion. Prior to this wealth shock, home prices increased rapidly for over a decade … the appreciation in house values and the associated rise in home equity from the 1950s to the early 1990s seems to closely match the growth in personal disposable income (i.e., income net of taxes).

Even before 2000, the increase in home equity did not appear disparate to the growth in personal disposable income. However, the two series show a growing “misalignment” after 2000, which was accompanied by the rapid growth of nontraditional mortgages from 2000 through 2006.

The increase in the supply of credit, especially credit facilitated by nontraditional mortgages, particularly for subprime mortgages, is believed to have contributed in no small measure to this misalignment. First, these mortgages provided an opportunity for homeownership—especially for first time home buyers—in an environment of rapidly increasing home prices by lowering the initial down payment. Second, subprime mortgages were designed as credit accommodation and debt consolidation products, which depend on the appreciation of the underlying asset rather than the ability of the borrower to repay the loan. Third, these mortgages encouraged investors to speculate in the housing market; some estimates show that investors account for half of purchase originations in states that experienced the largest housing booms and busts.

And, of course, we know what the reality is (and what happened to housing prices afterward). In the 1990s, Washington began to look at housing policy as social welfare policy, as outlined in the book Reckless Endangerment:

The mortgage crisis started with the “housers”—President Clinton and others who pushed for creative mortgage financing because they believed more Americans should own their own homes.

Then quasi-public Fannie Mae and Freddie Mac did away with their traditional underwriting criteria. That resulted in a wave of new mortgages and produced profits that pumped up executive bonuses at both institutions.

Then private mortgage execs took cues from Fannie and Freddie and wrote loans for individuals who would not have been deemed creditworthy a few years earlier. The problem was exacerbated by a mix of new products, corporate chutzpah, understaffed regulatory agencies and government moves opening lending, lowering reserve requirements and loosening appraisal rules.

Now, Mitt Romney said last night that if elected he might eliminate the Department of Housing and Urban Development. He’s also no fan of Fannie and Freddie and the whole GSE housing model. They all give Washington the means and the motive to use government to distort markets. And when you distort markets, this is what you get:

5 thoughts on “This chart shows why Romney is right to want to eliminate HUD

  1. You surely underestimate the role of HUD in our society. It does more than deal with home ownership. It assists homeless vets in finding affordable housing, it keeps families housed so their kids stay out of foster care because they would otherwise be living on the streets. Think what would happen if the elderly poor would lose housing assistance and be forced to live in their cars or (gasp) move in with their children. If you want less government then someone has to come forward and deal with the issues. Like the homeless living in the doorways of businesses and driving away customers.

    It also deals with discrimination issues, making sure that people gain equal access to housing. HUD will also make sure that housing is safe from harmful substances so that slum landlords don’t take advantage of the renter who will end up in the emergency room with long term health issues. So look at the big picture here please.

  2. Eliminating HUD is just a start. Get rid of Dept. of Education, Commerce, Energy, Surgeon General, Transportation and a few more that I forgot. Then, cut the workforce in ALL government entities by 15% – except the military. We are now on our way to getting our economic house in order – WITHOUT raising taxes. Go to zero based budgeting IMMEDIATELY. If more economic discipline is needed, cut government by another 10%.

    Enjoy the day.

  3. I don’t think Romney has said that all the functions of HUD would be eliminated, just delegated to other agencies. HUD is rife with waste and abuse as well as too large a social engineering mission. Eliminating departments does not automatically translate into eliminating all services provided.

  4. check the books Mitt, HUD turns a profit for the government. ever hear of mortgage insurance premiums? HUD collects MIP on over a trillion dollar portfolio that goes directly into the government coffers. HUD is a profit center.

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