“So, looking back, we know what led up to the housing correction – risky lending chasing rising home prices fueling more risky lending – until the bubble burst. Looking at the situation now, there are some short-term remedies to minimize the pain as the correction plays out. Looking ahead, there are some longer-term remedies that would help protect borrowers and sustain a healthy demand for homes.
But stepping back from the particular problems and solutions, what are the greater lessons we can learn from this experience, to ensure – as best we can – it never happens again?
Lessons tend to get better and clearer over time, but already, at least four seem clear.
- Lesson one: When they say the old rules don’t apply, apply the old rules. No market is exempted from the laws of gravity, and that includes housing and home loans. Home prices were not going to keep rising without interruption; supply and demand eventually have their due.
- Lesson two: Financial shocks often begin with a liquidity correction in one segment – in this case the subprime market – that spreads across the landscape. Modern credit markets are not divided into discrete buckets. When investors flee and the funding stops flowing to one area, it winds up affecting the entire watershed – in this case hurting not just people who made bad choices, but millions more who lose their jobs or can’t buy a home.
- Lesson three: The fractured nature of the industry, both in terms of participants and regulators, complicates a coordinated response to a crisis like this. Think about the parties involved when you buy a home – a builder, a Realtor, an inspector, a mortgage originator and/or broker, a title company, lawyers. And you could have gotten your mortgage under the unseen purview of any number of regulators: the Fed, the OCC, the OTS, the SEC…Accordingly, when problems arise, figuring out what the problem is, what to do about it, and who holds the policy controls takes time…
- Lesson four: The policy choices are not as stark as “free market” versus “bailout.” No one is in favor of bailouts. Nor does anyone seriously think American markets – particularly the financial markets – should be free from rules, regulations, or consequences. The best proposals, in fact, seek to help families who can be helped, strengthen consumer protections and provide a measure of stability to the market, while avoiding broad moral hazard.
Taken together, these four lessons point, I hope, to a new appreciation for the role of housing in the economy, in the financial markets, in our policymaking and in our political process. The correction has given us an opportunity to come together and remind ourselves of what’s really important: And that is the interests of the families who buy or rent the homes we build, sell, and finance. What’s good for them is good for housing, a good system, which can be made better.”