Is Another Housing Bubble Growing?

Jan 20, 2014
Originally published on January 20, 2014 3:52 pm

Peter Wallison, a conservative voice in the world of fiscal policy, sees signs of another housing bubble. He points to the growing gap between owning versus renting, and to a return to no-money-down mortgages.

He recently wrote a much-commented-upon opinion piece in the New York Times entitled “The Bubble is Back.” But unlike his most of colleagues on the 2011 Fiscal Crisis Inquiry Commission, Wallison blames government housing policy for the last bubble.

The government-sponsored and government-bailed out entities Fannie Mae and Freddie Mac still dominate the housing market, buying up loans and selling them to investors — just like they did before the bubble burst in 2007.

Wallison joins Here & Now’s Meghna Chakrabarti to discuss the potential housing bubble.


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Are we on the way to another housing bubble? Peter Wallison, a conservative voice on fiscal policy, thinks so. He sees signs of a bubble and wrote about it in a much-commented upon opinion piece in The New York Times entitled "The Bubble is Back." Now, Wallison was a dissenting member of the 2011 fiscal crisis inquiry commission, and he says that key lenders haven't changed much since then, specifically government-sponsored and taxpayer bailed out entities Fannie Mae and Freddie Mac that are buying and selling mortgages right now in much the same way they were doing when the last housing bubble burst. Peter Wallison joins us from Washington. Peter, welcome.

PETER WALLISON: Well, thanks.

CHAKRABARTI: So first of all, you say that there's a housing bubble out there right now. Make your case as to why.

WALLISON: How do you measure a housing bubble? And one of the ways to measure a housing bubble is to look at what rental costs are and then whether the cost of owning a home is higher or lower than the rental cost. And theoretically, if the cost is higher, then people will start to rent. And if the cost is lower, then people will start buying homes. And for many years, between 1983 when rental costs were look at carefully by the Bureau of Labor Standards at the Labor Department, the housing costs and rental costs tracked one another almost perfectly.

CHAKRABARTI: Tracked one another in terms of their rate of increase was roughly the same.

WALLISON: If you made a chart, you would find that the two lines were completely congruent, that is one and the other were together on any chart until 1997. And in 1997, housing started to depart from that steady line. Well, why was that? Many of us believe - I believe certainly - that one of the reasons was a very sharp decline, beginning in the mid-'90s in underwriting standards and, in particular, in down payment standards for homes.

And if you think about it, when someone has a 10 percent down payment, which was the traditional standard until about middle 1990s, you could buy a home of a certain cost. Let's assume it's $100,000 home. You'd have to put down $10,000. But underwriting standards began to decline in that period and especially down payments. And so people who wanted to buy homes, say $100,000 home, if they were only required to put down $5,000, well, the answer is they could buy a more expensive home.

CHAKRABARTI: Well, there was a - if I may, there was a lot of pressure from not just the world of real estate and not just from, say, government underwriters in terms of Fannie Mae and Freddie Mac, who were buying these mortgages, but, you know, the financial world as a whole. I mean, we saw no-money-down loans. We saw interest-only loans. The whole subprime crisis emerged from all of these. That is what you're describing is the stew that led to the financial crisis.

WALLISON: Exactly. Exactly. And it hasn't really changed. That was the point of the article that you saw in The New York Times.

CHAKRABARTI: But what's driving it this time around because I would say, a lot of buyers would say, credit for the average would-be homeowner credit is still pretty tight.

WALLISON: Well, there is talk about credit being tight. But, in fact, Fannie Mae, Freddie Mac, the FHA, that is the Federal Housing Administration, and other government agencies are making loans with down payments of 5 percent or less. And as I said in the article, about 53 percent of all of the loans that are being made in the United States today are loans for purchase of homes of 5 percent or less. We want to warn people that if that continues, if housing underwriting standards are kept low and if down payments are kept low, we are going to have another bubble. It might take several years. It might take as long as 10 years. And we'll find a lot of people will suffer when that bubble collapses.

CHAKRABARTI: Mm-hmm. Now, interestingly, in your article, you pointed out a fact which, I have to say, was a surprise to me. That before 1992, when down payments on average were 10, 20 percent, that the rate of homeownership in America wasn't all that different than it is today.

WALLISON: That's right. The rate did go up when these lower underwriting standards came into effect in 1992 and 1997. When housing prices collapsed, as will happen, when these bubbles developed and many, many of those people lost their homes, and that's the tragedy.

CHAKRABARTI: Now, this is a glass-half-empty or half-full question, because you see a housing bubble, but others see a recovery.

WALLISON: Yes. And, in fact, one of the extraordinary things about bubbles in general - and not just in housing, in the stock market, for example, we also have had bubbles. But one of the extraordinary things about them is that it's very hard to tell whether you are actually in a bubble. That's why I used rental standards, because then you can tell when, in fact, a bubble is developing.

Otherwise, it's extremely difficult to differentiate between a recovery and a bubble. And if we want to avoid bubbles, we ought to change our methods of looking at and using underwriting standards. And the way to do that is to cause the government to change its standards.

CHAKRABARTI: How fair is it to place the bulk of the blame on the government? Because there is an entire financial system separate from the government that has its hands all over the housing market. It did before 2008, and it continues to do so despite, you know, for example, the Dodd-Frank financial reform. I mean, I take your point that underwriting standards are a part of this picture, but certainly, it's not the whole of the picture.

WALLISON: It isn't perhaps the whole of the picture, and it isn't always the government, or only the government in this case. Right now, yes, the private sector is making loans that do require much stronger underwriting standards, because, in many cases, they have learned their lesson. From the standpoint of people who wanted to regulate the government, the Dodd-Frank Act does that in spades.

But it really doesn't do anything to control the lower underwriting standards that I think were the cause of the financial crisis. So I'm not surprised that we are seeing a bubble developing now. I would not be surprised to see if we had another financial crisis in 10 or 15 years, because we are following exactly the policies - from my perspective - that produced the financial crisis in 2008.

CHAKRABARTI: Well, Peter Wallison is a senior fellow at the American Enterprise Institute and a former member of the congressionally mandated Financial Crisis Inquiry Commission. Peter Wallison, thank you so much.

WALLISON: My pleasure. Thanks for inviting me.

CHAKRABARTI: Well, what do you see where you are? Is there a housing bubble forming around you? And if so, what do you think we ought to do about it? Let us know at This is HERE AND NOW. Transcript provided by NPR, Copyright NPR.