Was there a supply overhang before the housing crash?

Kevin Erdmann has a revisionist take, namely no:

How bad was the supply overhang? Surprisingly, the answer may be that there never was one.

We can think about this in terms of stock (the number of homes in the United States) or flow (the rate at which new homes were being built).

In terms of stock, the Census Bureau maintains estimates of both US population and the number of housing units. As shown in figure 1, the ratio of homes to adults in the United States rose in the 1980s as a result of factors such as changing marriage norms. The ratio then declined in the 1990s. The relative number of housing units increased somewhat from 2000 to 2005 but remained below the previous peak level. After the crisis, the decline continued.

…The Census data provide surprisingly little support for the claim that there were too many homes in 2005…

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.

Not surprisingly, three of the worst six “closed” cities are in California (San Francisco, San Diego, and San Jose).

Here is the full study.


Plenty of cheap housing in cities like Detroit, and in rural towns in Kansas, Iowa, ...

Home buyers and renters simply fail to acct rationally by the definition of economists who consider the natural world to be an externality that screws up perfect economic theory.

Dismiss nature to make economics more perfect.

Workers in San Jose should simply search for affordable housing in Detroit where they will find large classic houses on large city lots with no restriction on watering lawns.

Why? About the only company they could work for locally is Salesforce.

Nah -- there's a tech sector in SE Michigan. The automakers and suppliers do a lot of R&D. Think of all of the embedded software in vehicles, as well as factory automation, machine vision and robotics. Also, there's a concentration of autonomous vehicle R&D being done in and around Ann Arbor (Toyota's North American tech center is there). But it's not all auto related. There are several network security companies, for example:


Having reɑd this I thought it was extremely enlightening. I appreciate you spending some time and energy
tօ put this article together. I once again find myself personally spending way
too much time both reading and commenting.

Bᥙt so ᴡhat, it was still worthwhile!

Work in LA or SF, live in Detroit!

What's the problem? Reject externalities!

Externalities are just liberal fake news to justify higher costs, higher labor costs, higher taxes.

If there were a lot of amazing bargains on housing in the city of Detroit, some of the ~5M people who live in the region would be snapping it up themselves. But housing in Detroit comes with a 2.4% city income tax, a 3.5% property tax rate, and mind-blowing auto insurance rates -- more than double the next-highest city:


But, if you're a millenial with parents in the suburbs whose address you can use for auto insurance and/or you buy a new condo in a building with an 'enterprise zone' tax abatement, the numbers may not be too bad, and there has been some movement of 'white people with money' back into downtown. But it's not particularly cheap there, just not ruinously expensive.

But housing in Detroit comes with a 2.4% city income tax, a 3.5% property tax rate, and mind-blowing auto insurance rates

The taxes are not the problem. People gladly pay a ton of taxes to live in California and Manhattan. The problem with Detroit is you have to live around Detroiters, as reflected in high auto insurance premiums.

People make places. Honduras has prime Caribbean coastline, but Hondurans murder each other at incredible rates which is why the only way filibusters like Paul Romer can extract value from the real estate is to set up their own city and decide who gets to live there.

Nah, the deals were in Tracy, Modesto, Merced... No need to change jobs, either. Just accept the 2+ hour commute each way.

Housing is actually incredibly expensive in Detroit as a percent of income. The median renter in DC might pay $3000 per month in rent on an income of $5000 per month; that's 60%. The same renter moves to Detroit, pays $500 per month in rent and earns... $0 per month. That's infinity%.

They're living off something; government transfer payments mostly.

In other words, non-Detroiters are paying Detroit simply to exist as a municipality. Currently there is no easy mechanism to dissolve the net-consuming municipality and put its assets to more productive uses.

If someone can earn 5K a month in DC, they can definitely earn more than $0 in Detroit since they obviously have some job skills.

"The same renter moves to Detroit, pays $500 per month in rent and earns... $0 per month. That's infinity%."

What dictates changing jobs? Just keep the high paying DC job!

Economic theory says free market choice gives individuals the best results. Shop for the high pay DC jobs and the low priced Detroit house.

Economists argue that the free market makes this work.

Externalities are liberal fake news.

The problems with Detroit incude, but are not limited to, crime, taxes, public employee pension obligations, sh*try schools, horrible weather, and just plain ugliness. It is also not a good place to be if you are white. In a word, it's a sh*thole city.

I see Home Depot had a sale on broad tar brushes recently.
In reality, there are parts of Detroit that are not good places to be no matter what your skin color. That's true in a lot of city-- I live in Baltimore so I know something about crime-ridden cities. But there are also enclaves that have been reclaimed for a more middle class existence. Which is how cities gentrify.

The reason the Housing Bubble became the Housing Bust was because there turned out to be an undersupply of buyers who could afford big mortgages.

+1, just counting the numbers doesn't tell us how many were desirable. A neighborhood of just completed $300K houses, doesn't help the guy who just managed to find another job after 6 months of unemployment.

+1 A strong economy, including the housing market, needs a thriving or hopeful middle class. A deluded middle class just piles up credit card debt. A small cadre of rich folk don't help nuthin, they buy up assets and charge rents to the unlucky.

Paging Scott Sumner who has been saying this for many years!

Well, somebody in the last couple of hours seems to have decided that letting the reader's browser determine line length was the sort of thing that MR could dispense with. Obviously, line wrapping is an archaic idea that no one considers any longer.

Line wrapping works fine in Firefox - yep, cross browser testing is always a pain, especially for browsers that no one cares about.

Maybe the problem is that in SeaMonkey, with an HTTPS connection, insecure information is blocked. Firefox is likely a lot more tolerant of letting data leak.

Well, it isn't as if one expects much in the way of privacy or security at this sort of minor side project by two GMU professors.

Also I don't like the small window given to you to make your post, requiring some fancy keyboard skills if you want to change or review something you wrote before posting.

You know there's a whole thread dedicated to the knew look and feel from yesterday. Harping on it on multiple threads today is just bad manners.

But bad manners are his calling card.

Yawn. When will economists including Erdmann (he's an amateur, right?) finally conclude that, like Oakland, there's no "there" , there, when it comes to reasons why economies went down, anymore than the 'reasons' offered ex post of why the stock market crashed, including the crash of 1987? It would cost the mystique of economics at the gain of credibility. For example, by analogy, the Austrian economist M. Rothbard wrote about the Panic of 1837 citing some complicated reasons (I've not yet read his book, but it's on my list) however the best answer might simply be this (emphasis on the last line): "The Panic of 1837 was a financial crisis in the United States that touched off a major recession that lasted until the mid-1840s. Profits, prices, and wages went down while unemployment went up. Pessimism abounded during the time." (Wikipedia)

Bonus trivia: it's business as usual at the US housing agencies (Fannie, Freddie), which are still state subsidized and which still make about 15% profit on revenues, which is well above the 'normal' profit of 5% that other businesses make, including, surprisingly, companies that actually manufacture something, like Boeing, not to mention most restaurants and of course supermarkets, Walmart, department stores (which make less than 5%). Is that fair? End these subsidies now.

@Ray - the US government likes the current deal with Fannie and Freddie as they get to confiscate all the earnings it's a net positive cash flow situation. Mnuchin talked a good game about privatizing the two GSEs but as long as the money keeps coming that's not going to happen. The litigation started by Fairholme to try to get paid for their holdings of preferred stock of each entity is still in the courts and who knows whether it will ever be adjudicated. It was an illegal confiscation by the Obama Administration but nobody except for those of us who have some investments in these securities seem to care these days.

Thx, interesting... https://www.nytimes.com/2017/07/23/business/fannie-freddie-treasury-lawsuit.html

Given both were insolevent and they should have been liquidated wiping out all shareholder equity by a government wealth redistributing technocrat (bankruptcy judge) in 2008, 2009 at the latest, how have you lost anything?

Or was someone blocking you from injecting billions in capital into Fannie to keep it solvent? Was someone blocking you from paying full price for securities it held, but needed to liquidate to pay operating costs and repay mature debt?

FDIC related law, regulation, practice, established streamlined liquidation of depository banks, which liquidate assets to satisfy liabilities, leaving any excess assets if any for shareholders in bankruptcy. But that formal method was not available for investment banks or the GSEs in 2008/2009. Since Dodd-Frank, these institutions are to be taken over and liquidated just like FDIC banks have been.

I recall Friedman arguing that the lack of government insurance would lead to shareholders making sure banks like Fannie would never take risks an risk insolvency and bankruptcy liquidation.

While Fannie was "rewarded" for buying CRA mortgages, Fannie never was forced to be greedy to get the rewards of CRA. Shareholders wanted their cake after they had eaten it, profit from high risk without the cost of the high risk.

Note, investors in most of the competitors to Freddie and Fannie lost big, or everything. No one injected capital into them to keep them competing for business against Fannie and Freddie, so without taxpayers injecting capital, Freddie and Fannie would have been liquidated like the rest.

The problem was with the over supply of mortgages, not housing. Not to mention the use of financial engineering involving those mortgages, Along with major companies engaging in fraudulent practices - oddly, a number of them also based in California, such as Countrywide or New Century.

"Housing units" is an awful measure of housing supply. Square meters (or feet) is a lot better. Some hedonic measure taking into account other measures of quality (location, floor, quality etc.) would be better yet.

I believe housing units per adult is lowest in California, which only proves that there is a misallocation of housing units not an undersupply. I like my house, and it's important to me to have a comfortable place to live. But it's only a house. Americans invest way too much in housing, and not nearly enough in productive capital. I look around my low country home and observe the construction of many hundreds of new housing units as we recovered from the great recession, but hardly any new productive capital. Will all these new housing units make this area economically stronger when the next crisis hits? No, it will be a repeat of 2008-10, with a collapse in the price of housing (this is in large part a second home area). For most adults, their house in their largest investment, by far. When housing prices collapse, so does their net worth. Of course, that has many implications, including widespread support for aggressive monetary stimulus to re-inflate the price of housing (and other assets) during the next crisis. Groundhog day.

For normal people not on the autism spectrum, a home is more than housing. It is family, friends, neighbors, community, board memberships, community associations, and a sense of place that transcends time.

The Las Vegas shooter was a very rational buyer of nondescript houses. He flew alone from one empty house to another, avoiding contact with his neighbors. Then one day he collected all his weapons, rented a hotel room on an upper floor, and brutally murdered a bunch of people he didn't know, destroying the lives of many other people in the process.

He was bowling alone, and he liked it that way.

"I like my house, and it's important to me to have a comfortable place to live. But it's only a house. Americans invest way too much in housing, and not nearly enough in productive capital."

So, 'Do as I say, not as I do' ?

Nice try.

The US Census publishes a quarterly Housing Vacancies and Home Homeownership, Current House Reports.

The homeowner vacancy rate is about 1.6% normally, but rose to a record high (data start in 1956) of 2.9% in 2008. The rate was 2.7%, the second highest on record in 2007 before the recession started.

The recent vacancy rate, which is normally just under 8%, rose to 10% in 2008.

The gross vacancy rate, which includes everything including seasonal properties, rose from 11.9% in 1999 14.4% in 2008. It rose through the housing boom which construction was strong.

So, no, I don't think that construction was normal. The vacancy rates would not have increased so much if the market had been normal, if the construction had been just in response to population gains.

Look at private residential investment as a share of GDP, annual data, nominal dollars, data back to 1929. In each year, 2004, 2005, and 2006, that ratio exceeded 6%. Previously, only one year (1950 at the start of the postwar building boom) exceeded 6%. Does that make the mid-2000s sound a bit excessive?

We have to accept that banks set lending standards too easy. We have to accept that house prices rose too much. We have to accept we built too much housing. Excessive price increase and excessive construction tell an economist that demand rose very substantially and rapidly. Low interest rates and the global glut of savings played a role.

The regulators allowed it because the regulators wanted it. The Fed and the bank regulators get major blame.

But investors, bankers, speculators, share and bond holders, wanted it ten times as much as the regulators.

Thus, the people putting money into financing the boom and bubble are ten times to blame for the problem than regulators.

If no one with money put a dime into financing the excess or bad or subprime debt, there would have been no money lost on real estate in 2008+.

Ah, I think this study is flawed. The study focuses on housing in the aggregate. Although perhaps no housing glut implied in the aggregate numbers, there were severe imbalances on the local level.

Huh. It's almost like fiscal and monetary policy dictates lead to malinvestment by interfering with the market clearing process.

Free lunch economists consider a house in Detroit to be a perfect substitute for a house in SF or LA.

Errr, the conventional wisdom is that there was an oversupply of single family homes, and his data supports that. He's pointing to the stable total supply of housing units and low supply of multifams and prefabs. Well duh of course, that's what happens when a financial bubble is financing single fams for people who cant sustain the mortgages. This guy is either facetious or not firing all cylinders.

Comments for this post are closed