If you type “housing crisis” into Google, “2008” is no longer the first result. The subprime mortgage crisis that toppled the global economy just a decade ago has been supplanted on Google Trends by “housing crisis 2018.” This time, the crisis isn’t an overabundance of housing; it’s a chronic housing shortage. But economist Kevin Erdmann argues that the 2018 housing crisis is just the second act of the same tragedy.
With local governments issuing fewer building permits and millennials beginning to buy their first homes, millions of Americans struggle to find affordable housing in 2018. The crisis is arguably the worst in California, where about one-third of all city dwellers cannot afford local rents in every city in the state, from San Diego to Sacramento. Economists and policy experts who study housing largely agree that the chronic unaffordability of American housing stems from persistent shortages in the quantity of housing supplied relative to the quantity demanded.
Most housing scholars agree that “not in my backyard” (NIMBY) zoning laws are to blame. In many areas, NIMBY zoning laws have prevented developers from building multifamily housing in residential areas or have forced developers to adhere to mandated minimum lot sizes.
What resemblance, then, does our world of NIMBY-induced housing shortages have to do with the pre-2008 world of fast-and-loose credit policies [pdf] and overbuilt McMansions? That pre-2008 world, Erdmann argues, doesn’t really exist.[pdf]
The Traditional Story
The traditional loose credit story is an easy one to tell––it appeals to populist sentiments (by demonizing rich bankers) and exudes the moral weight of an anti-capitalist parable about greed and gluttony. It makes for a great movie, The Big Short. And, to its credit, the traditional credit story even seems to explain much of the financial bedlam of 2008. Banks and investors placed too much confidence in risky mortgage-backed assets, perhaps because they knew Congress would bail them out.
By focusing on big banks and complex financial instruments, the traditional story overlooks evidence in the real, physical economy of actual houses and homebuyers.
But by focusing on big banks and complex financial instruments, the traditional story overlooks evidence in the real, physical economy of actual houses and homebuyers.
According to the traditional narrative, the housing bubble saw an increase both in the supply of housing and the price of housing, fueled by a combination of loose monetary policy, irresponsible government-backed mortgages, and reckless Wall Street speculation. For the traditional story, the spike in new single-family home construction from 2000 to 2005 is the smoking gun.
Yet during the early 2000s, new residential construction overall was steady, with single-family homes simply displacing multifamily units like condos and apartments. Many high productivity population centers like New York, Los Angeles, and Seattle faced huge housing shortages in the early 2000s, evidenced by skyrocketing housing costs. Shortages in these cities—dubbed Closed Access cities—were caused, in large part, by laws that made it difficult to construct new housing.
Sound familiar?
Parallel Problems
Consider these two quotes, both from commentary in the Wall Street Journal, one from 2005 (the peak of the first housing crisis) and one from 2018. From 2005:
What we do have is a serious housing shortage and housing affordability crisis. Despite robust construction, unsold inventory stands at four months, well below its 25-year average. Private builders complain they can’t get land permitted to meet demand.
And from 2018:
A combination of tightened housing regulations, a lack of construction labor and a land shortage in highly prized areas is driving the crisis, according to industry experts…Now, construction isn’t matching rising demand, not only in glamour cities such as San Francisco and New York, but also in metropolitan areas such as Grand Rapids…That, in turn, is pushing up prices at what economists say is an unsustainable pace.
Both complain of high (and rising) real estate prices, and both indicate builders face major hurdles in keeping up with demand. Moreover, both attribute the supply shortage to local authorities’ stinginess with building permits—a direct result of NIMBY laws.
While the traditional story about credit may explain some of the demand side of inflated housing prices, Erdmann’s work demonstrates that more flexible housing policies in Closed Access cities could have headed off the shortage that generated the housing bubble.
Since the recession, federal housing agencies have stopped the credit policies, like “no income, no job, no assets” (NINJA) loans, that made housing deceitfully affordable during the pre-2008 shortages by saddling households with more debt than they could pay off. As a result, many potential homebuyers today are giving up on buying altogether.
Unsustainable Policies
Erdmann argues that an aggressive federal credit policy was actually the right move pre-2008 because it helped consumers buy housing at historically average levels, and he even recommends a return to those policies now. But the uncanny resemblance between housing markets in 2005 and 2018 should still be a cause for concern.
The Great Recession should have made it clear that a demand stimulus is not a sustainable solution to a supply problem.
For one, another housing bubble is not out of the question, and a housing collapse could still turn consumers skittish [pdf] and decrease spending across the economy. Readopting Fannie and Freddie’s pre-2008 mortgage practices would only exacerbate that risk. The Great Recession should have made it clear that a demand stimulus is not a sustainable solution to a supply problem.
But the ongoing shortage of housing in places that require more workers is also unsustainable. Besides the boom-and-bust risks of housing disequilibrium, housing shortages in Closed Access cities prevent people from working where they will be most productive and earn the highest wages. Over the last half-century, one paper from the National Bureau of Economic Research estimates, [pdf] prohibitively high housing prices have thereby reduced America’s growth by about half.
Relaxing Zoning Restrictions
On August 13, Housing and Urban Development (HUD) Secretary Ben Carson announced that the department would change the way it enforces the Fair Housing Act in order to address the housing crisis. Secretary Carson says he wants to incentivize cities to lower barriers to affordable housing by making HUD grants, which cities use to build and maintain roads, sewers, and other infrastructure contingent upon conforming to less restrictive zoning policies. Democratic Senator Cory Booker has also introduced legislation that seeks to take on restrictive zoning policy at the federal level.
Supply-focused approaches along these lines address the fundamental problem of the disequilibrium Erdmann describes in the housing market and reduce the risk of the boom-and-bust cycles that led to the Great Recession.
Supply-focused approaches along these lines address the fundamental problem of the disequilibrium Erdmann describes in the housing market and reduce the risk of the boom-and-bust cycles that led to the Great Recession.
The political economy problem of land and housing is as old as social science and will no doubt be with us for the foreseeable future, but reforms like Secretary Carson’s and Senator Booker’s are signs of lessons finally learned.
This article was reprinted with permission from Market Urbanism.
