Kevin Erdmann on the housing "bubble"
By Scott Sumner
Kevin Erdmann has produced a report for the Mercatus Center, discussing the housing bubble. Here is an excerpt:
Contrary to Chairman Bernanke’s assumption, at the national level there was no overhang of housing supply that needed to be worked off in 2011. Indeed, even in 2005 there was no national oversupply of housing. Rather, the American economy was burdened by a shortage of housing, especially in the Closed Access cities.
The housing bubble was concentrated in cities in the coastal Northeast, California, Nevada, Arizona, and Florida. Limiting our analysis to the 20 largest metropolitan areas, the Closed Access cities make up three-quarters of the “bubble” cities, in terms of total real estate valuation. Constrained housing supply was clearly the primary source of high prices in those cities, not excess demand. Prices in the Closed Access cities today remain as high relative to other cities as they were during the bubble because constrained supply is the fundamental reason for those high prices, not reckless credit markets.7
Even in other bubble cities with generous building policies, the primary cause of rising prices was the severe Closed Access shortage of housing. This is because those other bubble cities were the main destinations for households migrating out of the Closed Access cities. I call those cities Contagion cities, because in spite of their more generous building policies, they were overwhelmed by the problem created by the Closed Access cities. In the years leading up to the financial crisis, the shortage of housing in the Closed Access cities had become so severe that each year hundreds of thousands of households moved away in search of an affordable home. Many of them landed in inland California, Nevada, Arizona, and Florida.8
Figure 7 compares net domestic migration of Closed Access cities and Contagion cities. Notice that high rates of out-migration from Closed Access cities correspond to periods of large in-migration to the Contagion cities. Credit markets may have facilitated some of the housing activity during the housing bubble, but at its core this was a mass migration event caused by a lack of housing.
When Kevin first started working on his housing project, home prices in America were still severely depressed. At that time, many found his claims about the “bubble” to be rather far-fetched. Since then, home prices have recovered in many key cities and there is increasing agreement that supply constraints, not excessive demand, are the fundamental problem.
Kevin has also produced a comment on federal housing regulation for Mercatus. In this piece Kevin is more supportive of the GSEs than I am. One thing I like about Mercatus is that there is no official party line; we have a diversity of viewpoints.