April 11, 2018


Housing Was Undersupplied during the Great Housing Bubble (Kevin Erdmann, 4/10/18, , Mercatus Center)

The question that needs to be addressed about the housing bubble and the ensuing bust is not what caused prices to rise so sharply. That is a fairly straightforward question, with a standard economic answer. Fundamentally, there weren't enough houses.

What caused the massive out-migration from the Closed Access cities? The answer to that question is also, fundamentally, that there weren't enough houses.

This leaves one additional question that has been rarely asked, and which must be answered if we are to come to terms with the crisis that followed. If a lack of housing was fundamentally the cause of the housing bubble, then why had housing starts been collapsing for more than a year before the series of events occurred that we associate with the crisis, like nationally collapsing home prices, defaults, financial panics, and recession? And what caused the Closed Access migration event to suddenly stop at the same time as the collapse of housing starts?

For a decade, the collapse has been treated as if it was inevitable, and the important question seemed to be, What caused the bubble that led to the collapse? This needs to be flipped around. Given the urban housing shortage, it was rising prices that were inevitable. So the important question is, Why did prices and housing starts collapse even though the supply shortage remains? And why were housing starts still at depression levels in 2011?

The surprising answer to those questions may be that a housing bubble didn't lead to an inevitable recession. It may be that a moral panic developed about building and lending. The policies the public demanded as a result of that moral panic led to a recession that was largely self-inflicted and unnecessary. They also led to an unnecessary housing depression that continues to this day.

The crash was caused by the discovery of widespread fraud in the credit markets--tied to understating the risk involved in derivatives.  While there was nothing wrong with housing loans themselves, the ability to disguise riskier loans made the entire credit market unstable.

Posted by at April 11, 2018 4:04 AM