The Road to Perdition

As Shakespeare wrote in King Lear, “the road to perdition (hell, destruction) is paved with good intentions.”  While this is universally accepted for its obvious wisdom, its point is continually ignored.  One of the latest violations of this message may be the federal government’s attempt to increase home ownership in the US.  What could be wrong with that?  Who doesn’t want every American to own their own home?  This desire certainly qualifies as a good intention.

The hard way to accomplish this goal is to slowly improve the financial circumstances of millions of Americans so that they can actually afford to buy new homes.  The easy way is for the government to mandate banks to make home loans to people who can’t afford to pay those loans back.  As you might expect, the government took the easy way out in 1977 when they first passed the Community Reinvestment Act, which pushed banks to make loans in low to moderate income neighborhoods.  This led to a mini housing bubble in 1977 and 1978 when over 800,000 new homes were sold in America.

For perspective, from 1963 through 1995 the country produced a steady supply of new homes that averaged 603,000 new homes each year.  Over that 33-year history, new home production only exceeded that average by 20% three times, and two of those years were in ’77 and ’78. This artificial stimulation felt great, of course, because every new home employs three people for a year and brings in $90,000 in taxes to the treasury.  However, with every manufactured bubble comes the inevitable bust, and this mini bubble burst in 1981 and ’82 when the country’s new home production slumped to just over 400,000 per year.  This lost production resulted in over a million lost jobs from the bubble’s peak and certainly contributed to the recession of 1981-82.  But, did the government learn its lesson?  Of course not!

In fact, in 1994 and 1995 the government doubled down.  In 1994 Congress set out to rewrite and strengthen the Community Reinvestment Act, which was eventually passed in ’95 and was fortified by the Housing and Urban Development’s (HUD) national homeowner strategy.  These two moves lead to an explosion of new home sales and for the next 12 years we would surpass the 603,000 home average by more than 20% every year. In fact, between 2003 and 2006 we built over a million homes each year and actually doubled that average in 2004 and 2005 as we built over 1.2 million homes each year.  Remember, we only exceeded that level of production three times in the 32 years between 1963 and 1995. 

And, after 12 years of overheating, no amount of governmental rationalization could have prevented the unavoidable correction.  Franklin Raines (Fannie Mae CEO) guaranteed us that, “home prices are only going to go up.”  Barney Frank assured us to the bitter end that nothing was wrong with this policy or with Fannie Mae or Freddie Mac, the main vehicles of the policy, but the housing bust came.  It came just the same.

For the last four years, including 2011, we have averaged only 375,000 new homes per year and in the last two years we will average an anemic 320,000 homes.  That is 960,000 fewer homes from our peak in 2005.  Remember, each of these homes used to employ three people for a year and deliver $90,000 in taxes to the treasury.  That’s is a loss of almost three million jobs from the peak and over $86 billion in lost revenue to the federal government each year.  THAT is why many people, including me, believe that this manipulated housing bubble and bust is at the epicenter of our overall economic problems.  The road to destruction is paved with good intentions.

The moral of the story is - the federal government needs to get out of the fairy godmother business.  Beware of politicians who promise to eliminate suffering and poverty for all.  While their intentions may even be good, the unintended consequences of their programs will cause more pain than they relieve.  We need to think hard before we try to change our unalienable rights to Life, Liberty, the pursuit of Happiness, Health Care, a house to live in, a free College education, a guaranteed income, two cars in every garage and a chicken in every pot.  The country can’t afford these kinds of good intentions.  We need to go back to the original intent for the role of our government; to enable freedom of choice and demand our citizens take personal responsibility for those choices.