At one time, the NRA was considered the most powerful lobby in politics. Swap two letters and you have a different, lower-profile powerhouse: the NAR — the National Association of Realtors. The housing bubble was a product of public policy, and that public policy was driven by an influential alliance of real-estate brokers and developers who helped inflate housing prices, and real-estate agents’ commissions, to nosebleed levels. But the real-estate lobby isn’t limited to the brick-and-shingle pushers and the guys in the gold blazers. Local governments are deeply reliant on property-tax revenue, especially for schools, while market-distorting tax breaks directed at rewarding homeownership are sacrosanct to the American middle class — and to tax-battling conservatives, too. The real-estate lobby’s immediate agenda: Reinflate the housing bubble.
As it goes about its political business, the real-estate lobby is not snooty about the company it keeps. Republican, Democrat, Left or Right — tic the preferred policy boxes and not much else matters. You can even be the sort of person who, in private life, would be the real-estate industry’s worst nightmare: Consider Laura Richardson. In the course of four years, she managed to find herself in default on eight separate occasions for mortgages covering three different houses in California, real estate’s Armageddon. In one case, she took out a nothing-down mortgage and cashed out by taking $15,000 up front from the seller to cover closing costs but ignored her payments, letting the house slide first into disrepair and then into foreclosure. But the real-estate industry didn’t blacklist her. They sent her to Congress. Even better, they sent her to Vegas.
The National Association of Realtors spent $12 million in the 2008 election cycle, with the No. 1 recipient of their generosity being Representative Richardson, a Long Beach, Calif., Democrat who once held a real-estate license of her own. Their political-action committee put $20,000 into her campaign — making it by far her largest non-union donor. They also flew her to Las Vegas to participate in the swearing-in of a new NAR president. “I might be one of the newest members of Congress,” she told those gathered for the inauguration, “but I am not a new member of the realtor party.”
The party is spreading the political wealth: The NAR was the largest PAC donor to candidates in the 2008 election cycle, and, like the rest of the real-estate and financial sector, it dumped most of its money on Democrats. Other top PAC donors for the last election cycle included, to no one’s great surprise, more real-estate interests: the American Bankers Association and the National Association of Home Builders. Representative Richardson’s supporters include such familiar firms as Countrywide, a name now synonymous with the housing debacle.
The populist critique of lobbying — that it amounts to bribery — is only episodically accurate, and though the real-estate lobby has been generous with its money, the truth is that most Americans are true believers in homeownership, picket-fence romantics. Policies that encourage and reward homeownership are deeply embedded into our government and financial institutions, from the mortgage-interest deduction to the FHA loan. It’s a case of the best of intentions’ producing the worst of economics.
Consider the case of the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, which are at the center of the current meltdown. The GSEs created a market for poorly assessed real-estate securities based on mortgages implicitly guaranteed by the U.S. government, but doing this made it easier and cheaper for people to get mortgages, so nobody much bothered. Their mission was encouraged, and sometimes distorted, by political forces left and right. There was tremendous political pressure from Barack Obama’s community-organizing gang to get banks and institutions to loosen lending standards. The most frequently cited example of this is the Community Reinvestment Act, the effects of which probably have been overstated, but there is no denying that for a decade Barney Frank labored furiously against Republican efforts at tightening Fannie oversight. At the same time, tax-cutting Republicans zealously defended the mortgage-interest deduction, which did much to encourage interest-only loans during the boom — and added a new tax break, the capital-gains tax exemption for home sales, the effects of which are only now becoming clear.
The Taxpayer Relief Act of 1997 might well have been called the House Flippers’ Enabling Act, and it put a lot of money into the pockets of a lot of realtors: The law exempts most home sellers from paying capital-gains taxes on houses, without requiring them to invest the profits in new houses. It created what might be called a literal tax shelter: an investment you could live in while escaping the 20 percent tax on capital gains. When the dot-com bubble burst, the lure of tax-free real assets attracted a lot of investors looking to ride out market turbulence in the comfort of their new, highly leveraged homes. Republicans love a capital-gains tax cut, and they should, but creating special tax breaks for particular investments inevitably will warp the market. Predictably, capital gushed out of dot-bomb and into the housing bubble.
The result was the sort of thing that should offend every conservative’s inner Puritan: Buyers stopped calculating whether they could afford the house, and instead calculated whether they could afford the mortgage. The more daring buyers took out interest-only mortgages, placing a counterintuitive bet that buying a house they couldn’t afford would make them rich enough to afford it. That bet was hedged up by what is probably the most popular item in the U.S. tax code: the mortgage-interest deduction. That made interest-only loans a sweet deal indeed for the investors with good timing, which set off a rodeo of speculation: Borrow the whole nut, pay nothing but interest (which, thanks to the work of Alan Greenspan, might be less than rent would have run), get a huge income-tax benefit in return thanks to the mortgage-interest deduction, sell the house at a profit, and pay no taxes on the capital gain. Place a losing bet and you end up bankrupt or in foreclosure.
Protecting the mortgage-interest deduction is the first item on the National Association of Realtors’s political to-do list, and there’s broad bipartisan support in Congress for America’s favorite tax break. President Obama is on the other side: He is shaping up to be a real windmill jouster when it comes to class warfare, and he wants to phase out the mortgage-interest deduction for families earning more than $250,000. That proposal has about as good a chance of seeing the light of day as Obama’s college transcripts.
When it comes to “affordability,” the real-estate lobby has a wonderful talent for doublespeak. Criticizing Obama’s mortgage-interest-deduction proposal, National Association of Home Builders chairman Joe Robson complained that the move would “increase the cost of housing for many middle-class families.” But then he added that the proposal “will only further undercut the housing market” and “exert more downward pressure on home values.” Translation: Down is up. Of course a tax break would save homebuyers some cash; but “more downward pressure on home values” would save them a whole bunch more, and the most important factor working to “increase the cost of housing for many middle-class families” hasn’t been federal taxes, but rising house prices.
Special tax breaks have an army of supporters, and the realtors aren’t the only brigade on the march. For years, real-estate developers funneled money through nonprofits to provide down-payment grants to FHA borrowers who couldn’t even put together the 3 to 3.5 percent down payment required at the time. Classified as “gifts” for tax and legal purposes, these payments were described as “a scam” by the IRS, and Congress banned the practice in 2008, with critics saying it weakened lending practices and encouraged appraisal fraud. A bill to rescind the ban already has been introduced by Texas Democrat Al Green. Seller-funded down-payment assistance remains prohibited, but the real-estate lobby strongly supports bringing it back, and there is support in Congress for doing so.
But the fact that home builders can’t game the banks by giving away “free” down-payment money doesn’t mean that politicians can’t — and politicians, let us not forget, are part of the real-estate lobby too, especially the politicos who depend on real-estate taxes to fund their crusades. At the local level, cities such as Fort Worth, Texas, are using federal money to cover down payments for buyers of foreclosed houses in politically targeted ZIP codes. These programs are not aimed at helping the poor become homeowners, but the opposite: keeping prices high. In Utah, where housing prices are slightly lower than the national average, taxpayer-funded grants are used as an incentive for homebuyers with no upward limit on the price of the house, and the state has spent millions subsidizing the purchase of houses costing up to $700,000. The real-estate lobby fought hard to make sure that the stimulus bill would pour money into programs like this, and the grants can be combined with the new $8,000 federal tax rebate for first-time homebuyers, also part of the stimulus. The government will pay you good money to buy a house. What other lobby gets those results?
So what’s the next step for the Committee to Reinflate the Bubble? As keynote speaker at its annual conference this year, the NAR has invited Alan Greenspan, the godfather of the bubble. If that’s an indication of where the real-estate lobby’s heads are at, their heads are in a bubble, and they’re blowing as hard as they can.