Building from the Ground Up: Reclaiming the American Housing Boom, by Kevin Erdmann (Post Hill Press, 272 pp., $18)
What if the standard narrative of the Great Recession—in which a nationwide housing bubble, fueled by easy credit, newfangled financial shenanigans, a silly assumption that home prices could never decline, and excessive homebuilding tanked the entire economy—is wrong? What if, instead, the ultimate cause was that some of the country’s most prosperous metro areas didn’t have enough housing, which led to numerous negative consequences and policy overreactions? That’s the provocative thesis of Kevin Erdmann’s Building from the Ground Up: Reclaiming the American Housing Boom, which summarizes and builds on the Mercatus Center scholar’s work in several papers and his previous book Shut Out: How a Housing Shortage Caused the Great Recession and Crippled Our Economy.
As an end-all, be-all diagnosis of the recession’s causes, Building from the Ground Up is sure to generate more controversy than consensus. But it does an excellent job of drawing attention to the role that strict zoning laws played in the crisis. In important ways, the problem was that certain desirable regions had too little housing, not too much. And that issue remains with us today.
In claiming that economically successful coastal cities have insufficient housing, Erdmann is not exactly going out on a limb. It’s well-documented that housing in such places has become unbearably expensive, that population growth there has been slow or stagnant despite immense demand, and that rules for building more housing in these places are cumbersome and sometimes outright prohibitive. Erdmann’s contribution is to connect this fact to a new narrative about the housing boom and bust of the 2000s.
When some cities are highly attractive economic magnets, yet don’t allow new homes to be built, a zero-sum game ensues. For every household moving in, another has to move out. The mechanism for achieving that is rising prices, which are inevitable when demand rises but supply does not, and which encourage existing residents to leave. Renters find that they can pay lower prices elsewhere, and owners whose houses have gained immense value are tempted to cash out and spend the proceeds somewhere more affordable.
This process of expelling old residents by pricing them out creates some odd dynamics in these places, as when residents object to the creation of good new jobs in their city at Google or Amazon. But it also has spillover effects elsewhere. When people leave San Francisco or Los Angeles, they don’t scatter randomly throughout the country, but instead decamp in droves to, for example, nearby Phoenix.
Erdmann calls places like San Francisco and Los Angeles “closed access” cities, while places like Phoenix are “contagion” cities. Despite their looser zoning laws and willingness to build lots of housing, contagion cities couldn’t quite keep up with the influx of newcomers, which drove up prices. (A recent study confirms that, through migration, high housing costs can “spread” elsewhere from places with tight zoning regulations.) Contagion cities were also highly vulnerable to fluctuations in interstate migration, which is tied to unpredictable economic trends. When California-to-Phoenix migration abruptly dropped off, for example, the Phoenix housing market took a hit, as the expected next round of homebuyers never showed up.
Erdmann agrees with many parts of the usual housing-crisis story, especially in the contagion cities. He doesn’t deny, for example, that some newly built houses were left without buyers, that lenders made some dumb loans (think “NINJA” loans made with no proof of income, job, or assets), or that financial wizards came up with some pretty crazy products to fund it all (“synthetic CDOs” and the like).
Erdmann argues, though, that any real bubble was concentrated in the contagion cities, which in turn were victims of zoning policies in closed-access cities; that all the arcane financial nonsense affected how the crisis unfolded but didn’t cause it; that while there were “pockets of speculation toward the end of the housing boom,” there “really wasn’t a shift downward in average homeowner income or in measures like home buyers’ credit scores”; and that everything spiraled into a major recession because of a series of policy errors, not because a recession was an inevitable correction to nationwide excesses in the housing market. He writes that “in our misplaced effort to kill a housing bubble, we killed the economy.”
Regarding that project, Erdmann focuses on two errors in particular. First, Erdmann joins several of his Mercatus colleagues in giving the Federal Reserve a healthy share of the blame, alleging overly tight monetary policy. And second, lending standards tightened up to an extent that Erdmann argues was excessive—a result of political and not just market processes, including the enactment of Dodd-Frank and the placement of the “government-sponsored enterprises” into conservatorship. These standards further harmed the lower tiers of the housing market, including in cities where there’d been no bubble.
The Great Recession is well in the rearview mirror, but the coastal cities still aren’t allowing enough housing, with consequences that reach beyond their borders. Last year, the New York Times profiled Idaho as a place receiving a troublesome influx of Californians. And lending standards are still tighter than they have been historically, as seen in borrowers’ credit scores, Erdmann writes, though the national homeownership rate has been coming back up a bit.
Erdmann’s grand theory of what happened has strengths and weaknesses, as Timothy B. Lee explored in a Full Stack Economics article last year. Some recent developments—including a rebound of housing prices that looks, geographically, a lot like the supposed “bubble” from before—have been kind to Erdmann. But critics point to trends in housing vacancies and rents that don’t seem quite consistent with Erdmann’s full narrative. Measured nationally, the vacancies shot up in tandem with the alleged housing bubble; the rents did not. I’d add that while homeownership is great, it’s not the right choice for everyone, and we should be leery of re-loosening lending standards.
We’ll be arguing about what caused the Great Recession forever. But Erdmann’s ideas are worth grappling with, especially his biggest proposal: let people build housing where there’s demand for housing. That’s a good thing to do in itself, and it just might prevent the next crisis, too.
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