Home Sales Are Up and We Still Don't Get It

I heard on NPR last week that in March home sales experienced their biggest monthly surge in 47 years. The report stated that the surge was "likely capturing consumers who are trying to qualify for federal tax credits that will expire at the end of this month."

Is it just me, or didn't we get into this mess by tempting people to buy houses they could not afford?

It's not just me. In 2008 I read a Newsweek/Factcheck.org story which presented what is still the most concise, fair, thorough, and easy-to-understand explanation of the causes of the current economic crisis I've found. It's so good I decided to post a portion of it here:

The Real Deal
So who is to blame? There's plenty of blame to go around, and it doesn't fasten only on one party or even mainly on what Washington did or didn't do. As The Economist magazine noted recently, the problem is one of "layered irresponsibility ... with hard-working homeowners and billionaire villains each playing a role." Here's a partial list of those alleged to be at fault:

• The Federal Reserve, which slashed interest rates after the dot-com bubble burst, making credit cheap.
• Home buyers, who took advantage of easy credit to bid up the prices of homes excessively.
• Congress, which continues to support a mortgage tax deduction that gives consumers a tax incentive to buy more expensive houses.
• Real estate agents, most of whom work for the sellers rather than the buyers and who earned higher commissions from selling more expensive homes.
• The Clinton administration, which pushed for less stringent credit and downpayment requirements for working- and middle-class families.
• Mortgage brokers, who offered less-credit-worthy home buyers subprime, adjustable rate loans with low initial payments, but exploding interest rates.
• Former Federal Reserve chairman Alan Greenspan, who in 2004, near the peak of the housing bubble, encouraged Americans to take out adjustable rate mortgages.
• Wall Street firms, who paid too little attention to the quality of the risky loans that they bundled into Mortgage Backed Securities (MBS), and issued bonds using those securities as collateral.
• The Bush administration, which failed to provide needed government oversight of the increasingly dicey mortgage-backed securities market.
• An obscure accounting rule called mark-to-market, which can have the paradoxical result of making assets be worth less on paper than they are in reality during times of panic.
• Collective delusion, or a belief on the part of all parties that home prices would keep rising forever, no matter how high or how fast they had already gone up. 

A large majority of Americans today support financial reform, which is currently being battled out in Congress. I'm one of them. But to look at this crisis and say that financial reform is the whole picture and ignore irresponsible American home buyers and the unintended consequences of unwise government measures is shortsighted. If the federal government wishes to reform Wall Street to lessen future crises like the one we are experiencing, it must also reform itself. It could start by reforming the SEC (rather than creating a new federal regulatory agency), which is infamous for ignoring warnings about Bernie Madoff's crooked dealings for almost ten years and recently for watching pornography at work while the economy crashed. Or more easily and more obviously, by learning a bit from recent history and stopping its practice of encouraging folks to buy houses they cannot afford as we continue to experience the disastrous consequences of doing so.

Image: haglundc