Ever wonder what was the true cause of the housing bubble and financial crisis of the early 2000s? Conventional wisdom tends to follow a common theme of bad loans, greedy investors, and oversupply. But a recent book by Kevin Erdmann challenges some of these oft-held beliefs with a data-driven resource that could change minds on how to avoid a housing boom and bust in the future.
“Like everyone else, I once believed that the period before the Great Recession should be characterized as a time of excess—an excess of houses, of money, of federal subsidies, and of activism,” Erdmann writes in Shut Out: How a Housing Shortage Caused the Great Recession and Crippled our Economy. But he now believes that’s not the case at all.
Erdmann is a blogger at www.idiosyncraticwhisk.com, small business owner, and investor; he published the book earlier this year partnering with the Mercatus Center at George Mason University in Fairfax.
He notes that debates over causes of the bubble are really built on false premises. These include blaming federal players like Freddie and Fannie, and activists promoting “universal homeownership in the 1990s,” low interest rates, greedy bankers and CEOs, and borrowers unable to afford their loans. But he says these issues lack evidence. “To the contrary, at the heart of the housing ‘bubble,’ the sense of stagnation, and the sense of inequity is a distressing lack of homes,” he writes.
As such, misidentifying the real problem led to poor decision making and bad choices.
“At the local level, constricted supply is what pushed prices up, and, just as oxygen is drawn into the burning forest by the rising flames, mortgage credit was drawn into those housing markets,” he writes. “A narrow focus on credit and money has distorted our perception of what happened.”
Erdmann emphasizes that the higher prices, particularly in prosperous cities, forced individuals to move elsewhere. Net migration from these cities then increased—especially among low-income households.
He also notes that for more than two decades, high rent inflation had been the norm. “It is difficult to argue that there has ever been an oversupply of housing, even at the national level, when rent inflation has been persistently above core inflation,” he writes. “Wouldn’t an oversupply cause rents to decline?”
Another factor he notes is that at their peak, homeownership rates “among age groups under 65 years old” were no higher than those in the ‘70s and part of the ‘80s—even with interest rates eclipsing 10 percent in those decades.
In 2005, however, new housing construction dropped like a rock. Erdmann argues there wasn’t a housing bubble, but a “supply bust” in many places people wanted to live, particularly New York, Los Angeles, Boston, and San Francisco.
“After the turn of the century, millions of households flooded out of those cities because of the shortage of housing—so many that they overwhelmed cities in the main destinations for those households, such as inland California, Arizona, and Florida,” he writes. “Then we imposed a credit and monetary bust on the entire country in a misplaced attempt to alleviate the problem.”
Ultimately, he writes, speculation and bad lending got the blame, followed by monetary policies that didn’t really fix the problem, but it wasn’t the case.
“Contrary to conventional wisdom, the trigger of the financial crisis was not a surge of mortgage defaults among working-class homeowners,” Erdmann writes. “Losses among middle-class and working-class homeowners came late in the crisis, as a result of the recession and the disastrous monetary and credit policy decisions.”
To get the complete story, you can pick up a copy of Shut Out at Amazon.com.
Christopher Prawdzik and his wife Angela Logomasini are licensed Realtors® with Samson Properties in Alexandria. Operating as D.C. Region Real Estate, they serve the Virginia, Washington, D.C., and Maryland real estate market and offer comprehensive real estate services, including 4½% full-service listings.
© 2019 D.C. Region Real Estate