The Great American Housing Bubble


My new book, The Great American Housing Bubble:  What Went Wrong and How We Can Protect Ourselves in the Future is being released on Tuesday by Harvard University Press. The book is co-authored with my long-time collaborator, Wharton real estate economist Susan Wachter. It's the culmination of over a decade's worth of work on housing finance that began in the scramble of fall 2008 to come up with ways of assisting hard-pressed homeowners.

In the book we present a full-throated argument in favor of homeownership. Since the 2008 crisis, the policy goal of promoting homeownership has been subjected to much criticism, often misguided. While homeownership isn't for everyone, homeownership has numerous individual and societal benefits, including some that are not generally appreciated, particularly that it serves as a hedge against being priced out of a community because of gentrification. Homeownership is key to community stability, which produces all sorts of social benefits. 

The book is also a whodunnit regarding the housing bubble. It marshals a wealth of existing evidence plus some original hand-collected data to show definitively that this was a supply-driven bubble, and that the surfeit of underpriced mortgage finance was the product of the shift in financing from Fannie Mae and Freddie Mac to Wall Street securitization. The book explains why this shift happened and why the market wasn't able to detect and move against the deterioration in mortgage underwriting until it was already too late. In Clue parlance words, it was Mr. Moneybags, on the bond desk, with the CDO.  

The whodunnit story is also the story of the rise, fall, and rebirth of the American mortgage. We cover the waterfront on the history of housing finance and its regulation in America from WWI to present. Unlike most financial crisis books, our book does not feature the typical cast of archetypal characters: the wiley home flipper; the scurrilous mortgage banker; the savant investor; the rube money manager. Instead, its hero is a financial instrument, the 30-year fixed-rate mortgage or the "American mortgage".

The 30-year fixed is a product we take for granted in America, but it is a uniquely American product. Long-term, fixed-rate, fully-prepayable mortgages are simply not standard products anywhere else in the world (except Denmark). The American mortgage is the product of substantial government interventions in the mortgage market, and it has been a bedrock of systemic stability and of financial security for the American middle class. The housing bubble was marked by the abandonment of the American mortgage for a set of products that resembled the high-risk bullet loans that characterized the pre-New Deal market.

Ensuring the widespread availability of the American mortgage and the systemic stability benefits that flow from it require a certain set of institutions, and that sets the stage for our vision of a reformed housing finance system. You'll have to read our page-turner to find out just what we think should be done with Fannie and Freddie.

Highly recommended for summer quarantine or beach reading!