A former investor is set to try in the weeks ahead to convince Congress, regulators, and academia that they have fundamentally misunderstood the causes of the financial crisis.
Kevin Erdmann, now a visiting fellow with the libertarian Mercatus Institute set to meet with lawmakers and staffers, argues that the housing bubble and its collapse weren’t caused by Wall Street predation or the government — and in fact, that there might not have been a bubble at all.
Instead, in a book out this week, Shut Out, Erdmann concludes that restrictive land use regulations in big, coastal cities cut off the supply of housing and pushed up prices, creating a historic outmigration. Prices only collapsed when the federal government, in a panicked response, tightened mortgage credit.
“The housing bust was not caused by too much money, too many mortgages, or too many homes,” Erdmann writes. “It was caused by not enough.”
Part of Erdmann’s counterintuitive case is that the crisis-era housing market looks radically different when viewed at the local level rather than as a national phenomenon. The narrative that it suffered a nationwide bubble inflated by loose credit — based on the brute fact that mortgage debt doubled between 2000 and 2008 — conflicts with the experiences in individual cities.
Regions that Erdmann describes as “closed access,” such as New York City, Boston, the San Francisco Bay Area, and Los Angeles, featured many restrictions on new housing, soaring prices, and major outmigration — too little construction, not too much.
Faced with unaffordable housing costs, people fled those cities for “contagion” cities, such as Phoenix and Miami, which then saw big housing price increases when supply failed to keep up with rising demand.
“Open access” cities like Dallas, Houston, and Atlanta, meanwhile, generally built enough new housing to keep up with demand and saw more moderate price gains.
Only about 5 percent of the country, Erdmann reckons, experienced the housing bubble as depicted in, for instance, the popular movie “The Big Short,” which depicted ultra-easy credit tempting people into buying more housing than they could afford.
Rather, in cities like Boston and San Francisco, prices went up precisely because there was insufficient construction, because restrictive zoning and other land use rules made it difficult to build. And in “contagion” cities like Phoenix and Miami, a lot of demand for housing was driven not by speculative fever but by a desire to save on the part of people fleeing even higher prices in “closed access” cities.
Almost nowhere, Erdmann argues, saw an epidemic of overbuilding. Even during the bubble years, American “consumption” of housing was declining, not increasing — that is, people were living in smaller houses with fewer amenities, not bigger and nicer homes. Families in rich cities spent more money, and a greater share of their income, on housing.
It is true, Erdmann notes, that the 2000s did see a major increase in construction of single-family homes. But the growth in single-family housing was offset by reduced construction of apartments and manufactured homes. That is, there was a shift within the production of housing, not a big increase in overall construction.
Shut Out blames the shift on the lack of construction in “closed access” cities and illustrates the scale of the problem with a number of facts. The book notes that in 2005, for instance, Florida built more housing for Bostonians and New Yorkers than Boston or New York did.
Why then, did housing prices collapse, if they were justified by a lack of supply? Erdmann sees the collapse of housing prices in 2008 and afterward not as the outcome of a bubble bursting, but rather the result of the federal government choking off credit through tight monetary policy and tighter mortgage regulations, thereby crimping off demand.
By posing a challenge to the narratives prevalent on Capitol Hill, Shut Out is sure to invite scrutiny.
Democrats, generally, subscribe to a version of history laid out in the 2011 Financial Crisis Inquiry Commission report, which blamed the crisis on a combination of excesses by banks and private industry and failures by regulators.
Conservative Republicans have embraced the conclusion laid out in American Enterprise Institute scholar Peter Wallison’s dissent to the FCIC report, which blamed the crisis on the federal government encouraging risky lending through the mortgage giants Fannie Mae and Freddie Mac, as well as other programs.
Neither of those narratives fit the data Erdmann assembled or the argument he’s put forward, although they also don’t necessarily directly conflict with it. “My findings overturn presumptions about the inevitability of the crisis that people on both ends of the spectrum share,” he told the Washington Examiner by email.
Shut Out is a particular challenge to some of the scholarship on the crisis that, to date, had been the most authoritative, namely the finding by the University of Chicago economist Amir Sufi and the Princeton economist Atif Mian that loose or even fraudulent lending tempted people into buying homes they couldn’t afford, leading to disaster when home prices fell.
Erdmann doesn’t assert that their meticulous research is wrong, but rather that their interpretation of the data is off. He notes that, adjusting for age, overall housing indebtedness didn’t rise during the housing boom, suggesting that the growth in low-credit-score borrowing was a factor of an increase in younger families looking to buy houses, rather than a decline in credit standards leading marginal borrowers to buy homes.
Asked about Erdmann’s interpretation, Sufi said that the argument was “interesting” but that he didn’t have the time to comment further. Mian declined to comment.
Erdmann concludes that the “correct” prices for housing were probably closer to the peak than to the trough in 2008, a thesis that looks better in the light of the subsequent housing price recovery.
And he calls out the nation’s top economists, such as former Federal Reserve Chairman Ben Bernanke and current New York Fed President John Williams, for saying over the years that the housing industry is too hot. He specifically criticizes Boston Fed President Eric Rosengren for fretting that the number of cranes around his office in Boston could be a sign of too much construction.
What Boston needs is much more construction, not less, in Erdmann’s estimation, and the failure to understand that led to the recession.
