Over the last week, speaking at a variety of events, I heard three different representatives of the Left; first a Democrat US Senator, then a senior member of the Obama Administration, and finally a “consumer” advocate, all repeat the same narrative: all was fine in the housing market until predatory lenders forced hard-working honest families into foreclosure, which reduced house prices, bringing the economy to a crash. That’s correct, apparently the Left believes we all would still be seeing double-digit home price appreciation if it wasn’t for those evil lenders.
Undoubtedly foreclosures, especially those that result in houses that remain vacant for a considerable amount of time, have an adverse impact on surrounding property values. Many constitute a serious eye-sore and provide a haven for criminal activity. But did foreclosures really drive down prices, or were foreclosures first driven by price declines resulting from a bursting housing bubble? While causality is always difficult to establish with certainty, we do know that the rate of house price appreciation peaked and started declining about 18 months before the dramatic up-turn in mortgage delinquencies. If one prefers a more rigorous test, economists at the Boston Fed have directly tested if prices first drove foreclosures or whether foreclosures drove prices. Their results conclude that its was declining prices that matter, and that the price effect of foreclosures is minimal.
Why does any of this ultimately matter? Because if we craft policies to avoid the adverse impacts of the next property bubble based upon a narrative of “consumer protection” – as is being pushed by the Obama Administration, we will do little to avoid the creation of the next housing bubble and its damaging aftermath. Instead we should be focusing attention on those policies that contributed to the creation of the housing bubble: expansionary monetary policy and the Federal government’s blind pursuit of ever-expanding home-ownership rates at any cost.