CHAPTER 4
THE ECONOMICS
OF RECLAIMED HOUSES

The 2006 to 2008 subprime mortgage crisis
is strong evidence of the need to renovate our housing
finance system, and reusing building materials
is one tool we can use to help make housing more
affordable for everyone.

OUR CURRENT HOUSING MARKET is dependent on continuously increasing home prices for its success. Since the 1970s, it’s also a commodity open to speculation. The 2006 to 2008 subprime mortgage crisis — and the ongoing instability of the US housing market — shows that the system is unsustainable. The commoditization of our houses drives everyone from builders to bankers to use cheap materials and inflate prices. Homeowners and investors hope for ever-increasing home values because they view domiciles as financial investments. By using free and low-cost reclaimed building supplies, homeowners are creating zero- and low-debt homes for themselves, and project organizers are creating affordable housing for low-income residents. Creating homes that are built and financed with less reliance on conventional large mortgages could help shift our housing finance in a direction that allows for our homes to require a smaller portion of our financial resources, allowing more of our incomes to be allocated to other things such as better-quality food and health care. An examination of the many factors that led to the subprime mortgage crisis makes its own case for housing finance reform.

Many studies of the housing crash have been published, and many continue to be conducted and published. So many working parts were involved in the crisis that there is no way to pinpoint one cause. What we do know is that many average Americans lost their homes. And that we have no idea what will happen to housing prices in the future. Robert Shiller, a leading economist, professor and writer, told Business Insider Editor in Chief Henry Blodget in late January 2011, “It’s possible we could launch into another housing bubble if people think that the recovery is real and they want to get in early. We know one thing: According to the Michigan survey on consumer sentiment, people think that prices are low and that good buys are available. There is the beginning of bubble thinking, right there; all it takes is some sense that it’s going now. I’m sorry to be so weak as a forecaster. I think it could go either way.” By creating our own lower-cost homes with small or no mortgages, we keep our money out of the risky, unstable speculative housing market.

History of the Housing Crash

In January 2011, the Financial Crisis Inquiry Commission released a report, more than 500 pages long, on the causes of the crisis. It cites lack of government regulation, failures of corporate governance, excessive borrowing, risky investment and more. Despite the complex factors that worked in concert to lead to the crisis, the results were simple: the near-collapse of our financial system and the investment of trillions of taxpayer dollars into some of our largest financial institutions.

Though I’m not an economist, I believe anyone can take a look at this crisis and see the many flaws that led up to it. In 2006, housing prices were high and had been climbing steadily since the late 1990s. It was considered common knowledge — you probably heard the phrase tossed around — that housing prices could never go down. Investing in real estate was a sure thing, a positive for everyone, because it was the one investment practically guaranteed to return at high rates. And investments in housing weren’t returning just 1 or 2 percent, like many investments, but 5, 10 and 15 percent— numbers that made investors hungry to get a piece of the subprime mortgage pie.

It wasn’t just investors that wanted in on the action. As regular people saw and heard of huge returns in the housing sector, more and more wanted in.

Home-flipping television shows crowded airwaves. In a 2005 study conducted by Robert Shiller and fellow economist Karl Case, a poll of San Francisco homebuyers revealed their economic expectations for their new homes: The mean expected price increase was 14 percent a year; about a third of the home-buyers reported extravagant expectations of up to 50 percent a year.¹

Economists and government officials encouraged the booming housing market. The government for many decades had attempted to continuously increase homeownership. In a speech in Atlanta in 2002, President George W. Bush stated, “Too many American families, too many minorities, do not own a home.” Though American income levels stagnated during the eight-year Bush presidency, housing prices soared. In an interview, Bush’s first Treasury Secretary John Snow said, “The Bush administration took a lot of pride that homeownership had reached historic highs. But what we forgot in the process was that it has to be done in the context of people being able to afford their house. We now realize there was a high cost,” reports the New York Times.2 As the authors of the Times article, titled “Bush Drive for Home Ownership Fueled Housing Crisis,” Jo Becker et al., say, the housing market was one bright spot in a difficult economic climate that prioritized cutting taxes and privatizing Social Security. “Ever-rising home values kept the economy humming, as owners drew down on their equity to buy consumer goods and pack their children off to college.”

In cities across the nation, housing prices rose drastically from the early 2000s to the mid- to late 2000s, by 30 to 50 percent and more. Although a study conducted by Shiller and published in Irrational Exuberance shows housing prices in the US had stayed fairly constant with relation to inflation and population for the 100 years before the 1990s, housing prices jumped by 30 to 50 percent and more in the 10 years after 1998. In London, a home that cost around £100,000 in 1983 and £110,000 in 1995 was valued at about £330,000 in 2008. A Boston home that sold for around $100,000 in 1985 and around $110,000 in 1995 was worth about $225,000 in 2008.³

Though it seems clear in hindsight that something was going awry, even leading economists at the time seemed unaware, or unwilling to report, that housing prices were out of whack. According to the Times article,4 Lawrence Lindsay, Bush’s first chief economic adviser, said there was little impetus to raise alarms about the proliferation of easy credit that was helping Bush meet housing goals: “No one wanted to stop that bubble. It would have conflicted with the president’s own policies.”

As early as the middle of the Clinton administration, government economists issued warnings that the housing bubble may burst. Shiller writes that, in 1996, government economists and policy makers called him and his colleague John Y. Campbell to testify before the Federal Reserve Board about their beliefs that the housing bubble was going to burst. Shiller says, though he and Campbell expressed their concerns that the bubble was going to cause severe damage to the economy, no government policy changed.

In fact, George W. Bush increased the homeownership incentives that had been put into place by President Bill Clinton. Bush said, because of languishing incomes and increasing home prices, he would “use the mighty muscle of the federal government” to meet his goal of increased homeownership. The Times article says government policies at the time also encouraged the formation of small mortgage brokers and required continually lowering loan standards. “Bush pushed to allow first-time buyers to qualify for government-insured mortgages with no money down,” Becker et al. write. And though “Republican congressional leaders and some housing advocates balked, arguing that homeowners with no stake in their investments would be more prone to walk away,” the president was committed to increasing rates of homeowner-ship for low-income residents — in theory, a good idea for social welfare, but not when low-income residents were taking out loans they couldn’t afford to pay back. The president leaned on mortgage brokers and lenders to devise their own innovations, the Times writes. Bush said, “Corporate America has a responsibility to work to make America a compassionate place,” according to the article. Bush also insisted government-backed lending giants Fannie Mae and Freddie Mac meet ambitious new goals for low-income lending, en- couraging provisions that allowed first-time buyers to qualify for government-insured mortgages with no money down.

Market Forces Behind the Bubble

The major driving force behind the subprime mortgage crisis was the fact that homebuyers were taking out loans they couldn’t afford — though it wasn’t all their fault. While there was some irresponsible borrowing, there were also a number of factors working together to lead homebuyers to take out high and risky mortgages. And while government regulators seemed to rely on free market to discourage home loans to individuals who couldn’t afford it — after all, lenders are invested in getting their money back, so they require a reasonable amount of evidence (such as income level and credit history) to assure them homeowners could afford to repay loans — in this case, lenders were eager to put just about any applicant into a loan because they were not the ones responsible for collecting on them. The loans were being bundled and sold up a chain to Wall Street, and eventually on to high-level investors. Rather than having to wait to get their loan back with interest over 30 years, loan originators could get a quick payout by selling the promise of hundreds of mortgages-worth of money.

Lenders, driven to sell more mortgages, told potential homeowners they could afford the investment because their home equity would grow so fast, they could either refinance their loans based on the increase in equity they would see in a short time, or they could sell the home for a profit. By the mid-2000s, homebuyers with no credit history or income verification were being approved for NINA — No Income, No Assets — loans. Mortgage brokers didn’t care if homeowners ever paid their mortgages back because a greater-than-ever-in-history pool of investors was chomping at the bit to buy up low-income mortgages.

Some of the following information relies on the National Public Radio (NPR) series This American Life program #355, The Giant Pool of Money. The “global pool of money” refers to the amount of money held by everyone in the world. In 2000, the global pool of money was valued at around $36 trillion. It had taken hundreds of years to accumulate to that quantity. Six short years later, the global pool of money had grown to $70 trillion, largely because formerly poor countries had increased their wealth. This meant there was roughly twice as much money in the world that was seeking profitable investment.

Over the same period, from 2000 to 2006, the US Federal Reserve, under Chair Alan Greenspan, was keeping interest rates at very low levels (around one percent), meaning global investors couldn’t make money on US treasury bonds. Looking for stable investments with a decent rate of return, the investors turned to US mortgages. They contacted big investing firms like Morgan Stanley and asked to get in on the mortgage market. Mortgages at the time were returning five, seven and nine percent interest as the number of American homeowners and the value of American homes both grew. But these international investors couldn’t buy single mortgages, and they didn’t want to be involved at that level, so they turned to mortgage-backed securities — investments on large numbers of home mortgages bundled together.

So a chain developed that connected low-income subprime mortgage applicants with Wall Street investors: Small mortgage brokers sprouted up all over the country, offering loans to low- and no-income applicants. As pressure mounted from both the government and the financial sector, and deregulations allowed for fewer and fewer barriers to buying loans, a perfect storm was created.

Mike Francis was “executive director at Morgan Stanley on the residential mortgage trading desk at the beginning of the implosion,” he said in an interview for The Giant Pool of Money .⁵ He said this about mortgage bonds: “It was unbelievable. We almost couldn’t produce enough [bonds] to keep the appetite of the investors happy. More people wanted bonds than we could actually produce. That was our difficult task, trying to produce enough. They would call and ask ‘Do you have any more fixed rate? What have you got? What’s coming?’ From our standpoint, it’s like, there’s a guy out there with a lot of money. We gotta find a way to be his sole provider of bonds to fill his appetite. And his appetite’s massive.”

To increase mortgage-backed securities (the bonds the investors wanted), Mike Francis had to buy more mortgages. He asked colleagues like Mike Gar- ner, the head of the largest private mortgage bank in Nevada at the time, Silver State Mortgage, for more mortgages. Garner located individual mortgages and bundled them to sell to Mike Francis. It’s interesting to note that Garner had literally zero prior experience in the housing finance market — he’d left a bartending job to start his pop-up mortgage lending business.

As interest in bonds skyrocketed and regulation all but disappeared, lenders began employing all sorts of creative techniques to attract new potential homebuyers “with a proliferation of too-good-to-be-true teaser rates and interest-only loans that were sold to investors in a loosely regulated environment,” writes Becker et al.6 Predatory lenders also specifically targeted minority homebuyers. A study by two Princeton researchers published in the –American Sociological Review in October 2010 shows that minority homebuyers were disproportionately targeted for subprime mortgages, and experienced a disproportionately high level of foreclosure following the crash, compared with white borrowers.7 As investors continued seeing good returns on mortgage-backed securities, the need for ever-increasing numbers of mortgages exceeded the number of qualified borrowers. Lending standards were continuously dropped to allow more people to qualify for home mortgages. Individual mortgage lenders felt so much desire from investors to buy up home loans that they had virtually no risk in any mortgage they financed. Restrictions got looser and looser as corporations told government regulators such as the Security and Exchange Commission that the housing bubble was based on real value and was a boon to everyone in the US — including homeowners.

Meanwhile, Bush populated the financial system’s oversight agencies with people who, like him, wanted fewer rules, not more. Bush’s first chairman of the Securities and Exchange Commission promised a “kinder, gentler” agency, according to the Times article:

Bush’s banking regulators once brandished a chain saw over a 9,000-page pile of regulations as they promised to ease burdens on the industry. When states tried to use consumer protection laws to crack down on predatory lending, the comptroller of the currency blocked the effort, asserting that states had no authority over national banks....

The president did push rules aimed at requiring lenders to explain loan terms more clearly. But the White House shelved them in 2004, after industry-friendly members of Congress threatened to block confirmation of his new housing secretary. In the 2004 election cycle, mortgage bankers and brokers poured nearly $847,000 into Bush’s re-election campaign, more than triple their contributions in 2000, according to the non-partisan Center for Responsive Politics.

As the number of homeowners and value of loans increased, investors were buying up bonds based on speculation prices that assumed the people being approved for loans could afford to pay them back. All the easy money fueled its own cycle. Low-income citizens heard it was easy to get a mortgage, buy a house, sell it in a year and make some cash. They thought they could finance adjustable rate mortgages, pay only the small introductory interest rates, then move the loan along to the next buyer. That same thinking pervaded all the way up to the investment brokers on Wall Street.

As we know now, the bubble burst, and the entire system collapsed. The economics of the housing market proved unsustainable. Eventually, large investment firms had to settle their books, and as increasing numbers of mortgage-owners foreclosed, the bottom dropped out. Borrowers of the popular ARM (adjustable-rate mortgage) loans (about 80 percent of subprime loans) weren’t able to refinance as the borrowers had planned, and once the introductory rate was over, interest rates soared to double and triple initial rates. Investors lost money; people lost homes. In 2008, home foreclosures were up 225 percent compared with 2006, and 2008 saw more than 3.1 million foreclosure filings.⁸

The value of the houses was no longer based in reality — the market had artificially inflated the prices of homes to far above their actual value. Borrowers were saddled with debt two and three times the real value of their homes. And, though loan regulations have been increased greatly since the collapse, we’ve done nothing to fix the fundamental problem with our current housing finance system: It treats homes as for-profit commodities, and it is designed to only be successful if housing prices remain stable, or go up, but not if they go down.

Reducing the Cost of Housing

Housing prices today are still elevated by inefficiencies and high salaries. Overall housing prices can, and should, go down. One way we could create more affordable homes is through the use of all the materials we already have access to in current buildings. Though it is better for current investors if housing prices go up, in the long run, it is better for our society if housing prices go down. According to an economics principle known as Baumol’s Law, housing prices should, in fact, go down over time because they are within the category of “goods and services whose production is amenable to technological progress.”⁹

But Shiller says the concept of ever-increasing home prices is supported by several widespread myths that have grown up around housing and that help convince us that it’s logical for housing prices to continually increase — “the myth that, because of population growth and economic growth, and with the limited land resources available, the price of real estate must inevitably trend strongly upward through time.”¹⁰

Shiller uses the term “new era stories” to describe cultural myths that are not based in facts but that over time become widely believed because they are spread by word of mouth, focused upon by the media and falsely appear to be supported by unrelated factors. He says three “new era stories” support a belief in ever-increasing housing prices.

Myth: Land Is Limited

The first of the new era stories that contribute to our ability to believe housing prices should never fall is the idea that land is scarce. The argument goes like this: Housing prices can never go down because, even if more houses are built, we are running out of available land. Therefore limited land will lead to rising land prices, keeping housing prices on a continual upswing. However, Shiller counters, land is not limited. In fact, “according to the US Census for the year 2000, urban land area accounts for only 2.6 percent of total land area in the US. The high value of homes in major cities is accounted for by their location to the built environment, not the unique value of land.”¹¹

Although we should prize undeveloped land for its many benefits, land as a commodity is not limited. If we reconsider how and where we build our urban centers, we can create built environments that work with, rather than endanger, the biological systems around them. Though we must use our land resources with great care, a scarcity of land is not, in economic terms, justification for ever-increasing home costs. Expensive home prices that exclude low-income homeowners won’t lead to less need for land to be developed. Wisely designed cities that incorporate healthy spaces for low-income residents would be the best way to keep land development at a minimum.

Myth: Building Materials Are Limited

The next new era story that supports the myth that housing prices should continually increase is a supposed explosion in construction labor and material costs. The myth is that our building materials are scarce, and that their future reduced availability will drive home prices up.

Not only are our current building supplies not limited, literally hundreds of alternative building materials and methods exist, many of which are examined in this book. As the projects in this book show, we waste tons of building materials annually. Our current quantity of recycled building materials alone could supply much of our future needs. Each year in the US, we demolish approximately 250,000 buildings, according to the National Renewable Energy Laboratory,¹² and we build about 150,000 new buildings each year.13 Along with our vast stock of reclaimed housing supplies, and those available in existing buildings that will be modified in the future, many other alternative materials can also be used to build homes, as explored in chapter 7. Homes can be constructed from straw, clay, mud, aluminum cans, recycled tires and more.

Even if we limit our conversation to our current typical building materials — lumber, plaster, concrete, glass and steel—a supply shortage wouldn’t support ever-increasing home prices.14 Lumber is a renewable resource. Well-managed commercial forests can be run efficiently and effectively to continuously produce this resource. Advances in our cultivation, management and use of quicker-growing wood-producing plants such as bamboo and wood-replacement plants such as hemp will also help reduce our need for slow-growing trees.

Our other building materials are available in vast quantities, as well. Shiller explains:

Gypsum, the main ingredient of plaster and wallboard, is a very common mineral. The White Sands National Monument in New Mexico, famed for its views of massive white gypsum-sand dunes as far as the eye can see, contains 275 square miles of nearly pure gypsum sand. Although this particular site is protected, it is worth noting that White Sands alone would be enough to supply the world’s construction industry for hundreds of years. Limestone, the principal ingredient of the cement used for concrete, represents approximately 10 percent of all sedimentary rock formations on earth. Glass is made primarily, and sometimes entirely, from quartz. Quartz is the second most common mineral in the earth’s crust. Iron, the major ingredient of steel, is the fourth most abundant element on the earth’s surface, constituting 5 percent of the surface.¹⁵

Today’s most common building materials are not in limited supply, and as we will see in many examples, homes can also be constructed from straw, clay, mud, aluminum cans, recycled tires and much, much more. The notion that home prices will continuously increase based on limited building supplies is false.

The Myth of the Glamour City

The third new era story supporting our false belief in continuously increasing home prices is the myth of the glamour city. This new era story posits that the limited amount of space within our nation’s most desirable cities means housing prices will continue to increase because people will be clamoring to live in fewer available homes, particularly in desirable city neighborhoods. Although we will likely always see location premiums in great neighborhoods and cities, it doesn’t follow that home values nationwide would surge continuously because everyone will sacrifice many other aspects of their quality of life such as health, personal wealth and stress level to live in these areas. Increasing availability of affordable housing in well-designed livable cities and neighborhoods would drive the prices of urban-center housing down. According to the principle of supply and demand, a greater quantity of livable urban areas would drive down the prices of urban housing nationwide. Advances in building technology allow us to create taller, more efficiently and safely designed residential-use buildings than ever before. We will continue to provide increasing residential opportunities in our current cities.

As we will examine more fully in chapter 12, we can also create new urban centers. It often seems to us that our cities, with their generations of history and culture, could never be matched by other locales. However, people enjoy cities for a number of reasons. New urban centers provide citizens with the opportunity to shape their new home; once established, new urban centers develop a character of their own — within 50 years, they offer a rich and developing history. We often forget how recently some cities, once established, have come to be. Environmentally, creating more medium-sized cities is more advantageous than continuing to expand geographically outside current metropolises. Currently the most inefficient and most popular type of city development, suburbs are responsible for more carbon emissions per person than rural areas or urban centers. Most suburbanites rely almost entirely on personal vehicles for transportation. They travel farther distances not only to work, but to accomplish tasks usually performed on foot in the city. Suburban children often go to schools far from their homes, and centers of commerce lie in strip malls accessible almost exclusively by car. More people clustered in smaller areas require fewer resources and have a lower carbon footprint than those who travel long distances to faraway city centers. Increasingly intelligent city design and rising populations will work together to increase the number of attractive cities. Lester R. Brown, president of the Earth Policy Institute, cites one example in his book Plan B 4.0: Mobilizing to Save Civilization. Developer Sydney Kitson has acquired 91,000 acres in southern Florida on which he is developing the environmentally and socially minded community Babcock Ranch. The city will be almost entirely powered by an on-site solar photovoltaic energy facility, according to the Babcock Ranch website,16 and will be designed for pedestrians, mass transportation, community interaction and harmony with nature.

Regardless of any current limitations of residential spaces in our current cities, demand for ever-increasing city living options will drive us to create more and more urban living opportunities, not fewer and fewer as would be required to drive up housing prices. By ensuring we are using our urban spaces wisely and efficiently, and by creating new urban centers, suburbs and towns designed for local community living, we can reduce overall housing prices.

The Benefits of Affordable Housing

Despite the fact that a reduction in home values represents a loss for some homeowners and investors, over time, reduced housing prices benefit everyone, freeing our resources for other pursuits. While an overall reduction in the cost of housing may have short-term negative effects on current investors and some homeowners, the long-term economic and health benefits of providing low-income housing outweigh any losses that may be incurred by housing price reductions. Reclaiming our supply of housing materials rather than dumping it all in the landfill could help reduce the expense of providing and subsidizing affordable housing. HousingWorks RI, a coalition of nearly 140 organizations working to ensure that all Rhode Islanders have a quality, affordable home, says that studies have “quantified the economic impact and multiplier effect of investing in affordable homes.” The group says an initial Rhode Island investment of $37.5 million into the Building Homes Rhode Island affordable-housing program generated nearly $600 million in total economic activity, a $15.80 return on every $1 invested.17 Providing affordable housing frees up household income for other uses, improving health and the economy. A study on the positive impacts of affordable housing on health conducted by the Center for Housing Policy18 found numerous health and economic benefits to providing quality low-income housing. The study lists these nine benefits:

• Affordable housing may improve health outcomes by freeing up family resources for nutritious food and healthcare expenditures.

• By providing families with greater residential stability, affordable housing can reduce stress and related adverse health outcomes.

• Homeownership may contribute to health improvements by fostering greater self-esteem, increased residential stability and an increased sense of security and control over one’s physical environment.

• Well-constructed and managed affordable housing developments can reduce health problems associated with poor-quality housing by limiting exposure to allergens, neurotoxins and other dangers.

• Stable, affordable housing may improve health outcomes for the elderly and individuals with chronic illnesses and disabilities, by providing a stable and efficient platform for the ongoing delivery of health care and other necessary services.

• By providing families with access to neighborhoods of opportunity, certain affordable housing strategies can reduce stress, increase access to amenities and generate important health benefits.

• By alleviating crowding, affordable housing can reduce exposure to stressors and infectious disease, leading to improvements in physical and mental health.

• By allowing victims of domestic violence to escape abusive homes, affordable housing can lead to improvements in mental health and physical safety.

• Use of “green building” and “transit-oriented development” strategies can lower exposure to pollutants by improving the energy efficiency of homes and reducing reliance on personal vehicles.

By institutionalizing a method of using reclaimed materials to reduce the cost of building new low-income housing and renovating current blighted housing, we can benefit urban dwellers and our economy. As the subprime housing crisis proves, our current system of housing finance is not sustainable, and we can use homes built of reclaimed materials as a springboard to change the system.