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Clinton and the housing boom

Last week, I asked Dylan Matthews to pull together a graph tracking rates of homeownership against policies designed to increase homeownership. The result was surprising: Neither Fannie Mae, Freddie Mac, the Community Reinvestment Act, nor the tax reforms that created the mortgage-interest deduction showed a large, obvious effect. See for yourself:


"This got me wondering what exactly happened around 1995 to cause that jump," Dylan wrote to me. "Correlation isn't causation, but I dug up this document, the National Homeownership Strategy, which HUD Secretary Henry Cisneros and Bill Clinton announced in 1995. The strategy involved lowering standards for homeownership: reducing years of income first-time buyers needed to demonstrate, letting them tap retirement savings, letting mortgage sellers to use their own appraisers, etc. Here are a couple of articles interrogating its role in the subprime crisis. So here's the graph again, with the National Homeownership Strategy added."


There was a lot going on in this period, including the rise of securitization and the global money flows and Fed policies and interest rate drops that created the easy money that led to the easy credit that supercharged the mortgage market. And for all the intentions of the NHS, it's got a lot more rhetoric than policy. Still, it's a bit odd that the CRA and Fannie and Freddie have become so prominent in conservative retellings of the housing boom, but Clinton's NHS, which fits the timing much better, remains little known.

By Ezra Klein  |  June 21, 2010; 10:20 AM ET
Categories:  Charts and Graphs , Housing Crisis  
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"Still, it's a bit odd that the CRA and Fannie and Freddie have become so prominent in conservative retellings of the housing boom"

It's the conservative version of "never let a crisis go to waste". And there tends to be an ideological desire to suggest that, when something goes sour, it's because of everything your opposition has ever done in that category, even if you could credibly lay the blame on one thing (that you didn't spend much energy objecting to, at the time) the opposition did.

The "National Homeownership Strategy" actually represents the codification of the sorts of things conservatives are generally complaining about (and blaming the housing crisis on), but they want the blame of the CRA and the Freddie and Fannie and the existence of GSEs and any involvement of the government in home ownership. The issue may also be a bit muddled, as (if I am not mistaken) Fannie and Freddie regularly released guidelines for what types of mortgages they expected lenders to be making (to the point where they were lobbying heavily for subprime mortgages), and those guidelines were heavily influenced by the NHS.

BTW, the NHS doesn't just fits the timing, it also fits the details as to the most common profile of loans that ended up contributing to the housing bust. Where as the CRA, and the initial missions of Freddie and Fannie, do not.

As to why the GOP narrative hasn't brought up the NHS, I'd expect it has something to do with nature of ideological partisanship: they already know what the problem was--too much gummint!--so why keep digging?

Posted by: Kevin_Willis | June 21, 2010 10:32 AM | Report abuse

BTW, if I'm not mistaken, there is video out there of Andrew Cuomo talking about the NHS, and essentially predicting an increase in defaults, but trying to make the case that despite creating a new category of high-risk, high-default mortgage, it was actually a good thing.

Was looking for it, but can't locate it (yet).

Posted by: Kevin_Willis | June 21, 2010 10:36 AM | Report abuse

Funny, but on June 5th, in the comments under Klein's post "No, Fannie and Freddie did not cause the housing crisis", I quoted a long passage on Clinton, Cisneros, the CRA, HUD, and the FHA.

If you paid attention to your commenters, Klein, you might be marginally smarter.

Of course, trying to peg the housing "crisis" to one singular cause is moronic. It was the concert of GSEs, CRAs, HUDs, Clintons, Cisneros, with assists from Countrywide Financial (with Cisneros pal Angelo Mozilo at the helm) that drove the thing.

As usual, you're way behind the curve, Klein.

Posted by: msoja | June 21, 2010 10:41 AM | Report abuse

This is really interesting. I've always wondered how the GOP could possibly argue that Fannie, Freddie, and the CRA caused the financial crisis in the face of overwhelming evidence to the contrary. It's different from the argument about cap and trade or health care because no one REALLY knows what the effects of these policies will be, whereas we KNOW that the GSEs and the CRA didn't cause the crisis.

I think the GSEs and CRA fit the GOP narrative better and easier to point to than Clinton's NHS. For one, they've each been around a lot longer, and to the extent that the general public knows anything about any of these acronyms, they know more about the GSEs and CRA. It's also a lot easier to demonize a law or an agency than it is to demonize an obscure policy document from fifteen years ago.

Posted by: sheredlk | June 21, 2010 10:47 AM | Report abuse

*****The result was surprising: Neither Fannie Mae, Freddie Mac, the Community Reinvestment Act, nor the tax reforms that created the mortgage-interest deduction showed a large, obvious effect.******

This is surprising?

I thought it was fairly common knowledge -- at least among the wonkily inclined -- that America does not enjoy especially high rates of home ownership by rich world standards.

To justify the country's lavish subsidization of the debt-financed home ownership model, by rights we first need to know that increasing the rate of home ownership is actually a Good Thing on the merits. I think the case for this is tenuous at best.

But beyond that, one can't demonstrate that the subsidization policies even work at boosting the rate of home ownership.

The US is not the only rich country to have in place bad policies with lots of negatives side effects. We're just spectacularly good at it.

Posted by: Jasper999 | June 21, 2010 10:55 AM | Report abuse

Whether Freddie and Fannie caused the housing crisis isn't the point. They caused the US to bail them out at a projected cost of $400bn. That alone is reason enough for their abolition.

Posted by: MrDo64 | June 21, 2010 10:56 AM | Report abuse

You're better than this kind of "analysis," Ezra. What you've done in this post is akin to when conservatives point to a graph of the unemployment rate pre- and post-stimulus. You have, in that case, repeatedly pointed out that what is relevant is not what happened after the policy was enacted, but what happened relative to the absence of that policy.

So, regarding housing, did Fannie, Freddie, the CRA, or tax reform create significantly more homeowners than would have existed otherwise? I suspect, capable though he is, that such an analysis is beyond intern Dylan.

Home ownership is affected by so many different factors that merely marking the start of a policy on a graph of home ownership rates is about as useless an analysis as one could perform.

Posted by: MDA123 | June 21, 2010 10:58 AM | Report abuse

Ezra, your chart is a little misleading. Fannie Mae was turned into a publicly traded GSE in 1968, but it was created in 1938 as a government agency doing much of the same stuff it does as a GSE. And the mortgage-interest deduction was not created by the tax reform of 1986. All loan interest had been deductible up to then--car loans, credit cards, mortgages-- and had been since the income tax was instituted in 1913. The 1986 reform limited the deduction to mortgages.

Posted by: thehersch | June 21, 2010 10:59 AM | Report abuse

"Still, it's a bit odd that the CRA and Fannie and Freddie have become so prominent in conservative retellings of the housing boom, but Clinton's NHS, which fits the timing much better, remains little known."

Well, for one, the CRA explanation allows conservatives to blame black people for the crisis, so it's always going to come first.

Posted by: evvywevvy | June 21, 2010 11:12 AM | Report abuse

--"[T]he CRA explanation allows conservatives to blame black people"--

What rot. The conservatives I know routinely and loudly blame the *constructors* of the liberal plantation, those who exploit blacks for political gain. It's certainly not blacks' fault that Democrats pander to them in the innumerable ways they do. It's the Democrats who are on the moral low road. As usual.

Posted by: msoja | June 21, 2010 11:27 AM | Report abuse

@evvywevvy: "Well, for one, the CRA explanation allows conservatives to blame black people for the crisis, so it's always going to come first."

For that to be the case, the CRA would have had to help only (or at least primarily) black people. Is that actually the case? For example, there are more white people on welfare than black people, numerically. It would likely follow that there are more white people who have benefitted from CRA (just looking at demographics plus income distribution).

But I could certainly be mistaken.

Posted by: Kevin_Willis | June 21, 2010 11:37 AM | Report abuse

"...Bill Clinton announced in 1995 ... reducing years of income first-time buyers needed to demonstrate, letting them tap retirement savings, letting mortgage sellers to use their own appraisers, etc."

Ummm... isn't this one of the seeds of the financial collapse, ultimately leading responsible taxpayers to (essentially) pay for homes "owned" by others?

Posted by: rmgregory | June 21, 2010 11:43 AM | Report abuse

There are a lot of competing effects that are hard to disentangle. Ceteris paribus applies here. Certainly that 1995 housing strategy document played a role, although we should always be cautious of charts which show an 'obvious' effect.

It is hard to target policies. When policies are designed to increase homeownership, the price of owning a home rises relative to renting, and so some of the program's benefit will show up as lower rents relative to what would have otherwise occurred, keeping some of your target population as renters. A policy designed to increase homeownership might buy 1% higher homeownership rates, 5% higher home prices and 3% lower rents, relative to what would have otherwise occurred. Some of your intended effect leaked away.

Anyway, there are lots of important factors aside from public policy. Interest rates are an important factor. I think it is interesting to note home ownership rates rose during the 1965-1981 period even as interest rates soared. The mid 1990s was a period of falling interest rates and surely that contributed to higher homeownership.

As for the mid 1990s, we also have to remember that there was a strong economy, low unemployment and falling long-term interest rates which also likely helped increase homeownership. In the 2000s, the economy turned weak for a few years but rates fell substantially which helped keep the boom going.

Public policy matters too, in particular the interactions of various programs at various levels of government with market factors. The housing bubble was very much a local phenomenon (CA,FL,NZ,AZ had huge bubbles, places like TX, IL and OH didn't experience bubbles). A contributing factor in areas such as CA was local laws limiting land use - without the ability to increase supply when demand increases, prices soar. Houses have both consumption and investment uses, and so while supply and demand normally keep prices balanced, when prices take off there is a feedback effect which encourages more and more people to get into the market.

FNMA, FHLMC and the CRA all likely contributed. That there were started decades earlier doesn't account for much - it's important to consider both changes to the GSEs/CRA and also other market factors. Conservatives say that the CRA became incrementally more binding, particularly during the 1990s, and those not bound by its acts such as the private mortgage lenders had voluntary agreements in place in lieu of direct regulation (per Thomas Sowell). As for Fannie and Freddie, their impact would certainly be more powerful in a falling rate environment during the 1995-2005 period than during the rising rate/high rate environment of 1965-1990.

Posted by: justin84 | June 21, 2010 12:02 PM | Report abuse

In all it was a complex mess of very low interest rates, low lending standards at first encouraged by government and then seen as profitable by lenders, the ability to pass off risk, groupthink by financial institutions on the risk of MBS, not appreciating the inability of a firm like Moody's to accurrately rate MBS products which didn't have much of a history through down cycles, local laws limiting housing supply, the bubble mentality of soaring prices from places with limited housing supply, etc.

Once the bubble got going, the private sector did create a lot of damage, but it is also hard to believe there would have been a bubble without the promotion of homeownership even at the cost of lending standards, limitations on land use and low interest rates.

Posted by: justin84 | June 21, 2010 12:04 PM | Report abuse


This is a good point. Clearly there was a lot going on in the 1930s/1940s, but there was a large surge in real home prices during that time - which reversed a large decline in real home prices a few decades earlier. Not real sure about ownership rates although intutition suggests they went up sizably.

Posted by: justin84 | June 21, 2010 12:11 PM | Report abuse

In addition to showing when the CRA was created (1977) you should also indicate in which years there were substantial adjustments to the legislation in terms of the target percentages for the banks.

On tax reform, are you stating that there was no mortgage interest deduction prior to the 1986 act?

Lastly, I would believe that Fannie, Freddie, and to a lesser extent FHA would be the agents to implement the NHS.

Related to this is the interesting article in the NYT about how Fannie and Freddie are subsidizing a transfer of the housing stock from homeowners (foreclosed on) to investors:

Posted by: jnc4p | June 21, 2010 1:03 PM | Report abuse

I got news for everyone.

It wasn't increased home ownership that caused the recession.

The recession caused people to lose jobs and income and that in turn caused people to default on their mortgages.

Now, I ain't saying we shouldn't be more careful about who qualifies for certain kinds of loans or what kind of loans we should allow, but these people who bought homes didn't cause the recession; rather, they were victims.

The people who caused the recession were rich, white Republicans and Democrats.

Posted by: Lomillialor | June 21, 2010 1:04 PM | Report abuse

I think that graph is useless as is.

A lot of wealth was created in the 90s, and lots of people used that money to buy overpriced houses. Then as the demand rose for houses, developers started overbuilding inventories.

That graph could just as easily be used to prove that the increased wealth of the 90s caused home ownership to increase, and then as over-built-inventories went up and as a recession hit and caused people to lose jobs, ownership inevitably decreased.

Posted by: Lomillialor | June 21, 2010 1:34 PM | Report abuse

--"I ain't saying we shouldn't be more careful about who qualifies for certain kinds of loans or what kind of loans we should allow"--

You can write all the rules and regs you want, but as long as the government is in the business of guaranteeing the incompetence of the GSEs, and committed to bailing out anyone with sufficient political connections, it's going to be disaster after disaster. That's the way it is. You can worry about all that other stuff until you're blue in the face, but you're ignoring the 900 lb gorilla wrecking the place.

Posted by: msoja | June 21, 2010 1:41 PM | Report abuse

One of the big selling points when I bought my condo (in 2005) was that you only had to live in the place 2 years (2 out of the past 5 actually) and then you wouldn't have to pay any capital gains. So it was untaxed income. When did that law go into effect? I remember the agents saying it was recent.

Posted by: shaunakroy | June 21, 2010 1:56 PM | Report abuse


The gorilla was greed and avarice. It corrupted everything--gvmt, wall street, corporations, state and local politicians--everything.

Posted by: Lomillialor | June 21, 2010 2:11 PM | Report abuse

The capital gains tax exclusion for home sales went into effect in its current form in 1997.

Posted by: thehersch | June 21, 2010 2:15 PM | Report abuse

The question is NOT what caused ownership to go up, but what made it go down?

What happened in 2005 to cause the graph to plunge? Too bad Ezra didn't pin something on the graph at that point in time.

Posted by: Lomillialor | June 21, 2010 2:21 PM | Report abuse

But wasn't the greatest impetus inflated which the "housing bubble" development, and acceptance by securitizing entities in the early 2000s, of a means of valuing CDO's and the like.

Once investment banks settled on a method of valuing CDOs, and etc., securitzers sent the word throughout the land - "bring us mortgages"; and, thus, the fraud and sales of mortgages to folks whom even the originator knew would be unable to pay.

Posted by: ChrisBrown11 | June 21, 2010 3:30 PM | Report abuse


"It wasn't increased home ownership that caused the recession.

The recession caused people to lose jobs and income and that in turn caused people to default on their mortgages."

I'm pretty sure that the direction of causality ran from mortgage losses -> bank capital impairment -> credit crunch.

Now the recession itself added to the mortgage loss tally, and some economists argue that the Fed ran a tight money policy in the sense of not supplying enough money to prevent the deflation of late 2008, but from a real perspective mortgages started blowing up first. That's why the homeownership rate was falling several years before the recession began, and that's why you have retrospectively embarrassing quotes from Bernanke and Paulson circa '06 and '07 that the subprime problem would be 'contained'.

Posted by: justin84 | June 21, 2010 3:57 PM | Report abuse


33 million jobs were created under Clinton.

Under Bush, jobs literally stagnated. subprime mortgages did not cause that to happen.

Foreclosures happened AFTER people lost jobs, not because they once had jobs and a cheap loan.

Again, analysis should explain the dip in the graph, not the rise.

The rise is easily explained; namely, 33 million new jobs -> lots of new wealth -> lots of confident people wanting houses -> lots of lobbyists wanting cheap loans and new home development permits.

Posted by: Lomillialor | June 21, 2010 4:49 PM | Report abuse

Clinton presided over a 22-28 million net increase in jobs, depending on how its measured but yes that still looks pretty good. Bush was able to get 5.5-9 million during his first 7 years, again depending on measure, clearly quite a bit lower.

Somehow, I'd guess that if Bush Jr. was elected in '92 and Clinton was elected in '00, those job totals would be roughly equivalent. Anyway, that's speculative but it's hard to imagine the tech boom not occuring just because of who sat in the White House. Lower rates and a strong economy explain the 1995-2000 portion, but it wasn't just wealth created in the 1990s - things didn't get bubbly until the mid 2000s, after a lot of that 'wealth' was gone. In any case, there were places like the midwest and Texas that didn't have a bubble at all.

The dip in the graph is easily explained. Low interest rates, government encouragement to increase homeownership rates, and yes profit seeking + the ability to sell risk exposure on the part of lenders set the stage for a bubble. Local bubbles started to form in places with land use restrictions, but prices were rising across the country. Noticing this trend, combined with cheap credit and weak lending standards, people started jumping onto the bandwagon. But what cannot continue forever doesn't. From mid 2005 to mid 2006, interest rates on 30yr mortgages rose from the 5.75%-6.00% context to 6.50%-6.75% context. Between that and the ever growing prices for homes, the marginal buyers started to balk. Prices then stalled, and investment interest started to dry up. Then people who bought unaffordable homes and hoping that price appreciation would save them - or who were put into a mortgage they didn't understand - suddenly started blowing up. Homebuilders were caught flat footed with massive inventories, creating downwards price pressure and putting people underwater on their homes, creating a reason to walk away for some borrowers, putting further negative pressure on prices. Then credit began to tighten as losses showed up, reducing the availablity of mortages, and who wants to get in on a sinking ship anyways? As the downturn became a recession, joblosses exarcerbated the foreclosures but it just continued the trendline.

Posted by: justin84 | June 21, 2010 5:54 PM | Report abuse

The Fannie Mae line shows privatization not foundation (I don't know if it was called Fannie Mae before it was privatized but I think it was). The event was that LBJ wanted to get Fannie Mae's debt of the Federal books so that he wouldn't run into the debt ceiling.

The change in home ownership promotion was delayed. Maybe a publicly owned Fannie Mae wouldn't have lowered it standards to preserve market share (the original definition of "sub prime" is that Fannie and Freddie wouldn't buy them). But that lowering occured in the past decade not the 60s.

Also you didn't really ever think there was much of anything to the CRA did you ?

Posted by: rjw88 | June 21, 2010 10:57 PM | Report abuse

Ezra, it was the capital gains exclusion combined with deductible interest. Housing was the only 'investment' offering such incentives, yet was historically the most risk-free investment. Why did it need any incentives at all? And why at the price of discouraging investments in alternatives, such as the stock market for companies doing R&D for alternative energy, communications, name it. And encouraging the house-as-ATM mentality as well (

Timeline of the United States Housing Bubble:
Compare the following dates to your chart.

1997 July: Section 121 allowed for a $100,000 one-time exclusion in capital gain for sellers 55 years or older at the time of sale.

July 1997: The Taxpayer Relief Act of 1997 repealed the Section 121 exclusion and section 1034 rollover rules, and replaced them with a $500,000 married/$250,000 single exclusion of gain on the sale of a home, available once every two years. This encouraged people to invest in second homes and investment properties.
November: Fannie Mae helped First Union Capital Markets and Bear, Stearns & Co launch the first publicly available securitization of CRA loans, issuing $384.6 million of such securities. All carried a Fannie Mae guarantee as to timely interest and principal.

Posted by: TomJx | June 25, 2010 1:55 PM | Report abuse

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