Book review
Title: "Real Estate and the Financial Crisis: How Turmoil in the Capital Markets is Restructuring Real Estate Finance."
Author: Anthony Downs.
Publisher: Urban Land Institute, May 2009, 202 pages, $29.95 list ($21.56 on

Audio interview: Click here to hear an audio interview with author Anthony Downs.

When Anthony Downs, a Stanford-educated economist and well-known real estate writer, was finishing up his latest book, "Real Estate and the Financial Crisis: How Turmoil in the Capital Markets is Restructuring Real Estate Finance," the turmoil was so great that he had to revise his draft six times before submitting it for publication.

But I’m glad he did, because for anyone seeking to gain a comprehensive understanding of the historical economic and political trends which have led us to the current day, this book could be a good fit.

Moreover, the author offers a variety of specific policy prescriptions for what ails real estate finance, although he also admits that such strong medicine may be too bitter for politicians and lobbyists to swallow.

As a senior fellow at the well-respected Brookings Institution, a Washington, D.C., think tank with decades spent studying real estate markets, Downs didn’t have to rely much on outside experts: in fact, he said that most of his research was conducted on the Internet. He cautions, though, that for the research novice it’s often difficult to distinguish between fact and fiction on the World Wide (and wild) Web.

Downs, with 26 other books and more than 500 articles to his credit, has taken readers down similar paths before, including 2007’s "Niagara of Capital: How Global Capital Has Transformed Housing and Real Estate Markets" as well as "An Economic Theory of Democracy" (1957) and "Inside Bureaucracy" (1967), the latter two of which are considered academic classics.

Consequently, although the book is designed somewhat like a textbook in format — including nine chapters and various subsections — the author’s narrative gift for telling stories about complicated economic and political issues makes his latest release easy to both skim and read in greater detail (you may find yourself jotting down notes in the margins). He doesn’t "dumb down" the subject matter like a populist real estate book with an exclamation point in the title might do.

In order to get readers up to speed relatively quickly, "Real Estate and the Financial Crisis" begins with a 30-page primer on nine fundamental factors before and after the year 2000 that set in motion the economic malaise of 2007-09.

Just by identifying these factors alone — which range from the increasing speed and ease of financial transactions and the global influx of low-wage workers in labor markets to a surge in foreign capital, tax advantages favoring costly homes and the shifting of funds into real estate — Downs unveils his strategy for the rest of his book, allowing readers to skip to those chapters they deem most important.

For example, whereas a mortgage banker might focus on chapter three, "Subprime Lending and Housing Foreclosures," a commercial property developer on chapter four, "The Financial Crisis and Commercial Property Markets," and a Wall Street type on chapter five, "The Basic Instability of U.S. Financial Markets," chapters six through nine should be of interest to all readers. …CONTINUED

That’s because it’s in these final chapters where the author reviews the primary public-policy responses to the financial crisis, offers new or altered ones for improving the system, asks and answers some short-term questions about the economy, and reviews potential long-term consequences of the financial crisis.

To be sure, some of Downs’ policy suggestions, such as requiring buyers to pony up at least 10 percent of the purchase price of a home using their own funds; making negative-amortizing loans illegal; bringing back rules on maximum interest rates for mortgages; and preventing speculation by fining the purchasers of owner-occupied homes who neglect to actually occupy them — although full of both common and economic sense — face formidable odds on the political stage due to well-entrenched interests that have beaten back such changes for decades.

Still, given the author’s theory that political trends tend to swing between conservative and more liberal philosophies in 15-year cycles, it’s quite possible — and even probable — that we’ll continue to see increased regulation throughout the Obama administration and beyond.

In other words, the recent changes imposed on the credit-card industry may be a foreshadowing of similar rules impacting the federal tax code (including fairer treatment of tax benefits to homeowners of different incomes), how mortgages are explained and sold, as well as greater transparency and responsibility on the securitization, ratings and sales of both residential and commercial mortgage pools.

Towards the end of the book, Downs gets out his economic crystal ball to peer ahead into the future, and what he sees still remains a bit murky: a credit crunch lasting another one to three years, the real estate capital market gradually improving as investors grow impatient with other asset classes, but a timeline that will depend greatly on how the broader stock market fares in comparison.

Within that context, the author assigns probabilities to four potential future scenarios, including a weak U.S. recession and a speedy recovery by the end of 2009 (15 percent chance); a bad U.S. recession in 2009 and tight credit through 2010 (65 percent); a more serious recession lasting throughout 2010 resulting in a collapse of the dollar and higher interest rates (8 percent); and a recession lasting two to three years including massive federal spending, ongoing inflationary pressures and high interest rates (12 percent).

So what is Downs’ latest update from my interview with him? A 65 percent chance of a two-year recession (lasting into 2010), and new housing production levels lower in 2009 than in 2008.

Let’s just hope that it’s this scenario that turns out to be true and not the one which leads to rampant inflation, high interest rates and a dollar collapse.

Audio interview: Listen to Patrick Duffy’s interview with Anthony Downs on

Patrick S. Duffy is a freelance writer. He is also a principal with MetroIntelligence Real Estate Advisors and author of The Housing Chronicles Blog.


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