Sowell on Causation and Correlation

(Edited Sept 17, 2009) In his most recent book, "The Housing Boom and Bust," Thomas Sowell quotes the Millennial Housing Commission which wrote

Decent and affordable housing has a demonstrable impact on family stability and the life outcomes of children. Decent housing is an indispensable building block of healthy neighborhoods, and thus shapes the quality of community life...Better housing can lead to better outcomes for individuals, communities, and American society as a whole.

Sowell argues that the authors confused causality with correlation, writing

It is certainly true that neighborhoods with better housing also usually have more stable families, better educated children and lower crime rates. But statisticians have long pointed out that correlation is not causation, though that may be the most often ignored lesson statistics.

Sowell notes that using the logic of the Millennial Housing Commission, early policy makers tore down slums to force people into better neighborhoods. Later, policy makers used kinder methods such as financial incentives and lowered lending standards to entice people into better neighborhoods, As might be expected when you assume causation when only correlation exists, the government actions have had little positive effect.

I think that the Millennial Housing Commission may have reversed causality. More stable families create better neighborhoods and better housing. Perhaps there is an omitted variable that causes both better families and better neighborhoods. What do you think?