As the housing boom wore on, successively greater shares of the housing stock were being purchased by borrowers that were not capable of financing the home.  From an economic efficiency perspective, the “productivity” of the money invested in these new houses was falling.  Instead of investing in new technologies that could enhance our efficiency, government incentives drove more and more money toward building houses that could not be sustained. 

Furthermore, many of the construction jobs created by the boom in the housing sector were filled by illegal immigrants, as the work and pay, while not attractive to many Americans, was attractive to this group.  The surge in illegal immigration during the housing boom, and its subsequent drop during the housing bust, is simply a rational response to the capital investments that the American economy was making.

What is troubling for American workers, however, is not the illegal immigration but the skewed capital investment.  Government policies encouraged investment dollars to be allocated toward less productive projects that will not increase worker productivity.  Without productivity growth, there is no income growth. 

The way forward takes time.  Due to the excessive build-up of unproductive homes, we must go through the process of readjusting our capital stock toward more productive uses.  Because real resources were used to build these homes, money that could have been allocated toward projects that would have increased workers incomes and our national wealth, have been wasted.  Luckily, we have already experienced much of the re-adjustment pain, although there is more to come.  Oil prices have been dropping as well, which should offset some of the pain as the affordability of food and gas should improve.

We will be unlucky, however, if we take the wrong lessons from our recent history.  The housing crisis did not occur due to deregulation or a failure of the market.  What has failed is a regulatory structure that promoted “socially responsible” visions above common sense.  Time and time again, history has shown us that chasing the economic dream of a central planner ends with a crisis.  The housing bubble is simply another example.