Daily Archives: April 11, 2018

Was Housing Undersupplied During the Bubble?

Kevin Erdmann has a post up positing that there wasn’t any overbuilding during the housing bubble of the 00s. It’s not as crazy as you think. At a national level, in fact, the argument is pretty compelling.

The basic story is that there has been a troubling trend of declining housing construction over the last two decades. This shows up if you measure new housing construction relative to factors like total population growth or adult population growth, or total housing units relative to total population.

The problem, of course, is that housing is an unusually immobile good, such that having enough housing at a national level doesn’t really help you. Extra houses in Detroit – or even in Adelanto – don’t help solve a housing shortage in Los Angeles. Unlike, say, automobiles or almonds, you can’t simply pick up houses and move them to places where there’s more demand.

Erdmann describes this in terms of “Closed Access” cities and “Contagion” cities. Closed Access cities, like Los Angeles, are places where zoning makes new housing construction very difficult. Contagion cities, like the Inland Empire and Phoenix, are places where housing construction is easier and where many people forced out of the Closed Access cities by high housing costs end up migrating to. The Contagion cities ended up bearing the brunt of the crash as migration from Closed Access cities slowed, though it is picking back up in recent years.

Erdmann’s Figure 3 is particularly interesting, as it shows housing construction at the national level broken down into single-family (SFR), manufactured (mobile), and multi-family (MFR). It’s clear that the 2000s boom in SFR construction was very nearly offset by a decline in MFR and manufactured home construction. The contention is that MFR construction that would have taken place in the Closed Access cities was displaced and became SFR construction in the Contagion cities. Looking at housing permits in Los Angeles & Orange Counties since 1988, it’s hard to disagree. Housing construction in LA/OC remained at low levels, despite much higher real prices than in the 1980s.

LAOC starts.png

The collapse in manufactured home production should also be troubling, as they are typically some of the most affordable housing units produced. It’s possible that manufactured housing production has dried up due to lack of needed zoning in suburban areas.

Erdmann’s conclusion, that the collapse and subsequent housing depression was actually caused by a “moral panic… about building and lending,” strikes me as odd, and not supported by facts, in the blog post or otherwise. I’m old enough to remember the crash in real time and the AAA securities backed by people who never had a prayer of paying back their loans, and to have friends who lived in condo complexes that were wracked by the resulting foreclosures. While there may not have been an oversupply problem in total, there was a problem of having many higher-end SFRs in suburbs and not enough affordable MFR in cities. The people who could not afford the suburban mortgages might have been able to afford more modest urban rents.

In this case, the experience of Texas is instructive. Like the Inland Empire, Phoenix, and Florida, Texas receives substantial domestic migration from Closed Access Cities like New York and Los Angeles. Yet, Texas saw much more modest price appreciation in the bubble, and a smaller bust during the crash – in other words, Texas cities didn’t become Contagion cities. The Dallas Fed published a short paper suggesting that Texas’s unique constitutional restrictions on maximum mortgage loan-to-value helped mitigate the boom and the bust:

In Texas, after purchase, mortgage debt along with any new borrowing – including home equity loans – cannot exceed 80 percent of a home’s market value unless the new debt funds home improvements.

Sadly, the lesson of Texas seems to have been lost. As prices in places like California keep rising, there will be another wave of out migration of vulnerable residents. There will also be increasing pressure on regulators and finance institutions to get loose again to make housing “affordable”, setting the stage for the next bus.