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One of my favorite phrases is “the law of unintended consequences.” Unfortunately the unintended consequence is usually not beneficial. In the wake of the Great Depression, the US government began a series of interventions into the housing market. Most analysis of the housing market has focused on foreclosures, mortgage backed securities and subprime loans. What has not been examined is the effect of the intervention on the quality of construction. My contention is it has significantly decreased quality.

The first major intervention in the market was Federal Home Loan Act signed by Herbert Hoover in 1932. It was enacted to provide credit reserve to support housing. It was not successful in boosting home ownership, but that did not prevent government from trying again. In 1933 Franklin D Roosevelt created the Home Owner’s Loan Corporation and in 1934 created the Federal Housing Administration. The FHA set standards for long term mortgage lending. In 1938 FDR created the Federal National Mortgage Association (Fannie Mae). With each succeeding intervention the government became more entangled in to the market.

Possibly the biggest intervention was post World War II. The Servicemen’s Readjustment Act of 1944 or GI Bill provided assistance to return veterans. Suddenly 12 million veterans were able to purchase homes when many probably would never have qualified. There were 114,000 starts in 1944 and by 1950 this had increased to 1,692,000. Homeownership rose from under 44% to 55% in just 7 years.

Prior to the Great Depression, private homeownership was limited primarily to the very rich and to those who physically built their own homes. In both cases these were generally built by highly skilled artisans. Many of these homes were of they highest quality of construction. Even when built with very little luxury, the basic construction was excellent. At one point our company offices were located in a house built in 1921. It was not particularly well appointed but the bones of the house were unbelievable well-built. Wood materials used in that era were harder woods and larger size.

In order to increase almost 15 times the housing starts of 1944 by 1950 there had to be a change in paradigm for housing construction. William J Levitt had built temporary structures for the military during World War II. These houses used manufactured components that were assembled onsite by unskilled laborers. Levitt saw the advantage of using cheap labor and after the war began building the first “Levittown” on Long Island and at its peaks a house was completed every 15 minutes on average. While quality suffered, the efficiency of construction was incredible. Everything was designed to standard sizes and space was maximized.

In 1970 the average square footage of a US home was 1400 square feet. By 2008 the average home had increased to 2534 square feet. What caused this increase? In 1968 Fannie Mae was privatized and the responsibility of government issued mortgages became the responsibility of the new agency Government National Mortgage Association (Ginnie Mae). Then in 1970, the government created the Federal Home Loan Mortgage Corporation (Freddie Mac) to compete against Fannie Mae. These government sponsored enterprises (GSE) created a secondary mortgage market that was based on an illusion that ultimately the federal government would back any failed loans. A lot has been written about the effect of these loans.

In the 1970s down payment requirements varied between 20 to 30 percent. By the mid-80s this had decreased to 10 percent. By the mid-90s this was down even further to 5 percent and by 2005 this had decrease to 3 to 0 percent down. Along with variable rate mortgages and loan products with negative amortization, Americans were encouraged indirectly by Freddie and Fannie to build bigger homes and more homes. Homeownership rates soared to 68.1 percent by 2008.

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