There are many obvious reasons for the takeover of Fannie and Freddie yesterday by the Federal government. They include shoring up under-capitalized lenders crucial to the economy and the housing market, restoring confidence in the US financial system, and avoiding a 1990s Japanese style economic "flat line" economy. There are less obvious reasons. There has been a long war between completely private mortgage lenders and brokers, such as FM Watch, whose members include firms like GE Capital and GMAC, which have been trying to put the two FMs out of business. This animosity toward the two FMs is from the very companies that brought us the sub-prime mortgage, a mortgage "product" the two FMs did not offer.
Yet the underlying cause of the housing crisis has yet to be understood. Yes, the private firms that wanted the two FMs out of the way sparked the housing crisis by devising, selling and quickly dumping sub-prime mortgages on duped investors and homeowners. But the $500 billion of loan losses recognized so far by sub-prime mortgage investors and banks is a relatively small part of the $12 trillion mortgage market.
The underlying, yet unrecognized, reason for the take over of Fannie and Freddie is the structural change in the real estate market in general and housing in particular. Many fringe, drivable sub-urban houses are "under water"; their houses are worth less than their mortgages. Freddie and Fannie may not have invested in sub-primes but they did in these fringe housing mortgages. The owners of these houses are dealing with increased energy costs for gasoline this summer and for heat this winter, which is driving down their house values. That is on top of the fact that demographics and consumer preference over the next 20 years favor in-town or inner suburban housing.
The market has changed and is demanding more walkable urban housing. In town and inner suburban housing values are being maintained and even slightly increasing in the terrible current market, while many drivable-only fringe houses have been and will be permanently reduced in value. The trend to date is that fringe housing values seem to have dropped twice the average price decline in a metropolitan area, while in-town and inner suburban housing values have been flat.
This structural change in real estate will mean a permanent reduction in values on the fringe which will probably not rebound when the housing market recovers. The $500 billion written down so far is a down payment on the eventual cost to the economy of sprawl coming to an end.
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Christopher B. Leinberger is a land use strategist, developer, teacher, consultant and author, helping to make progressive development profitable. He is currently a Visiting Fellow at the Brookings Institution in Washington, D.C. He is the author of The Option of Urbanism: Investing in a New American Dream from Island Press.
