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The Seeds of Our Housing Crisis Were Planted in the Reagan Era – Common Edge

Though economists and historians will study the decline of the American economy and the rise of oligarchic capitalism for decades, those who lament the resulting loss of affordable housing and infrastructure must also understand how politics affected the building sector. For most of the 20th century the nation had banking, education, and labor policies that spurred the construction and design industries, but after 1980 things changed dramatically. Our government scrapped protections for workers, including construction workers, and curtailed the influence of unions. The financial sector was gradually unleashed with policies that allowed investment banks to make riskier investments in real estate. All of these policies—along with the U.S. Department of Housing and Urban Development’s abandonment of programs that supplied low and moderate income rental units—had a devastating impact on the housing sector.

Historians mark the mid-1970s as a turning point in capitalist economic history: cycles of growth and decline were regular and predictable before the Arab oil embargo and the energy crisis. Thomas Piketty and others pointed out that a generally equal distribution of wealth following the end of World War II came to an end in the third quarter of the century with Reaganomics and subsequent policies favoring the top 1%.

The economic boom that followed the Eisenhower era building of the interstate highway system made way for the suburban expansion I knew as a kid growing up in Illinois, California, and Seattle, Washington. Indeed, almost half of the current U.S. housing stock was constructed before 1980, according to the National Association of Home Builders. Data from the U.S. Census indicate that after 1940, the peak decade for single-family house construction was the 1970s, when baby boomers were most in need of housing. The 1920s were a growth decade in general construction, but that surge dissipated during the Great Depression. Likewise, as housing and construction took off during the 1990s, the Great Recession in 2008 put an abrupt halt to the upward trend. Architects were lulled into complacency as the bubble expanded and then blindsided when the economy tanked.

Banks and Lending Before and After Reagan

President Reagan and his economic advisers not only promoted “trickle down” policies favoring the rich but also passed legislation that changed banking laws to promote riskier and more expansive lending practices among interstate commercial banks. A 2020 paper from St. Andrews University analyzed financial deregulation after 1980, pointing out that prior to that date, U.S. banks were stable but not competitive, and many laws forbade state banks from doing business outside their state boundaries. The reforms that followed the Great Depression, mainly during the Roosevelt administration, strictly limited what banks could do. The Glass-Steagall Act of 1933 prohibited commercial banks from trading in securities and managing investments. The 1927 McFadden Act had already prohibited interstate branch banking, protecting local institutions that lent money for building with a close eye on risk management.

George Bailey’s travails in It’s A Wonderful Life were a reenactment of the problems that had led to the Great Depression. As the St. Andrews study makes clear, “in 1980, there were many banks, but few branches,” precisely the opposite of today’s landscape. I bought my first house in Houston in 1984, with a loan from an old-fashioned local bank. The closing took five minutes, and interest rates were negligible. Today, George Bailey is anyone under 40, and I’m the boomer they all envy.

Guided by the Federal Reserve and the U.S. Treasury, banks offered relatively low interest rates on loans from 1955 to 1977, between 2% and 6% on average. Rates were even more stable between 1965 and 1977. Steady rates made mortgage lending simple and predictable, and banks had little risk of defaults. Indeed, bank failures were rare before Reaganomics changed the rules. The 1980s savings and loan crisis was a canary in the coal mine for what would come in 2008. There would be few interest rate barriers to home ownership were it not for decades of bank deregulation.

When Alan Greenspan took over as Fed chair in 1987, the body had already expressed doubts about restrictions on investment banking activities in national banks. Greenspan further loosened those restrictions, giving rise to more money market funds and other instruments, with the justification that U.S. banks were not globally competitive. These and other moves created the nationwide banking system we have today. In 1975 there were almost 75,000 banks; by 2005 the number was less than 25,000.

With the Garn-St Germain Depository Institutions Act of 1982, the government removed all restrictions against real estate lending by national banks, permitting them to enter a market that had...