Chillin' out till it needs to be funded
Ever since the ancient Greeks, financial innovation has enabled more people to purchase homes. Today is no different: in fact, responsible financial innovation is now the best tool available for “rebooting” crippled housing markets, improving their efficiency, and making housing more accessible to millions. In Fixing the Housing Market, three leading experts explain how, covering everything decision-makers should know about today’s housing and financial markets.
The authors first explain how innovative housing financial products, services and institutions evolved through the 19th century, World War I, the Great Depression, World War II, and beyond — culminating in the post-1970s era of securitization. Next, they assess housing finance systems in mature economies during and after the recent crisis, highlighting benefits and risks associated with each widely-used mortgage funding structure and product. They also carefully assess current housing finance structures in emerging economies such as Brazil, Russia, India, and China.
Building on these insights, the authors introduce transformative financial innovations that can facilitate a more stable and sustainable financing system for housing — providing better shelter for more people, helping the industry recover, and creating thousands of new jobs. Using these new tools, entrepreneurs, economic development specialists, and policymakers can develop practical strategies for bridging funding gaps — raising more capital for longer terms at lower cost.
Bottom of the back cover
A history of financial innovation in housing
From “mortgage stones” to mortgage-backed securities, and beyond
What went wrong?
Why housing markets really failed: learning the right lessons
Promoting more robust, stable, and sustainable housing markets
Implementing productive solutions, avoiding counterproductive policies
Delivering the right products via the right delivery modes
Crafting the right financial structures for new construction, access, and retrofitting
This volume is part of a series of books on financial innovation, published through a collaboration between Wharton School Publishing and The Milken Institute. Future volumes will focus on other frontiers of financial innovation, including such critical topics as healthcare, energy, and environmental finance.
Customer Review from Amazon.com ( 1 of 2 5 star reviews)
Readers of the authors’ excellent Financing the Future will not be surprised that the account starts with Neolithic housing and moves on to real estate financing in ancient Egypt, Greece, India, Mesopotamia and China. The history lesson, which is brought up to the present day, is short, informative and fun to read. The important point is that financial innovations are needed to provide decent shelter.
This positive attitude is refreshing in a debate that seems to be dominated by those people determined to pin all problems on government versus people pushing unaffordable expansions of government programs that have failed dismally in the past. To start with this book points out that the real housing problem is that over half the world lives in cities (for the first time in history) and over half of those people live in slums. All projected future population growth will occur in cities and even optimistic estimates of the increase in decent urban housing stock will not provide significant shelter for these new households. The only hope is a vibrant and innovative housing market, which will require energy and fresh thinking, not ideological battles.
The book traces a variety of ways that governments can help, mostly by getting out of the way. Land use restrictions for the benefit of existing residents, tax and subsidy policies that favor ownership over renting, corruption and burdensome bureaucracy in all aspects of developing and financing real estate and political marginalization of people with inadequate housing are major impediments to solutions. But governments do have some positive contributions to make, including clarifying property rights, simplifying legal structures and providing carefully-targeted subsidies. More aggressive government programs are analyzed critically. The mortgage interest deduction in the United States, for example, is hugely expensive and subsidizes relatively wealthy people, encouraging them to buy more and bigger houses and actually depleting the available stock for everyone else. Government housing projects have been massive disasters, as have most intrusive subsidies and price controls. Simple vouchers schemes for people unable to afford decent housing are, by contrast, cheap and effective.
The financial system comes in for its share of blame as well, but from a different perspective than the usual account. The authors spent little time lamenting recklessness, and no time worrying about greed. The focus is on innovations that address the problem, because in their view it will take a well-functioning market to house everyone. Unlike many other accounts, this one points out forcefully that most innovations, both in constructing and financing housing, fail, including ideas from well-regarded geniuses like Frank Lloyd Wright and Buckminster Fuller. But some succeed and this book catalogs many of them: both historical and recent.
My one point of disagreement is there is scant consideration of the fact that a lot of powerful people don’t want everyone to have decent housing. There is a constant emphasis on public-private partnerships in which philanthropists and enlightened regulators smooth the path for honest and competent profit-oriented entrepreneurs. There are examples of relatively small-scale success of these efforts, and a suggestion that by building on the ideas that work, we can solve the large-scale problems. But converting slums to decent apartments requires extensive changes in the nature of urban living. It will be denser, with people having less control of their environment. Just as suburban living eviscerated many US inner cities, some of these innovations may spell the end of middle-class suburbs. There is an important political dimension to this, suburbanites isolated from many urban problems vote differently than newly-empowered people rescued from slums. Another change not everyone will welcome is a redirection of individual saving, especially retirement saving, from bank and government mediated business investment to disintermediated economic support for residential housing. The subsidies the authors want to see for people trying to afford decent housing have to come from somewhere, both the people who already have decent housing and the people who cannot afford decent housing even with help will likely find arguments against such plans.
However you feel about these issues, this is an essential reference laying out the history and issues, including many aspects you won’t read about anywhere else. It’s short and easy to read, but packed with essential information. And, right or wrong, at least it’s focused on positive innovation to make the future better instead of finger-pointing about past abuses. I recommend this book for anyone interested in either housing or economics.