Thursday, April 12, 2018

Oversupply of Housing and the Financial Crisis

It’s become a factoid about the financial crisis of 2007-9 that construction companies were building too many homes that eventually were abandoned when owners could no longer make mortgage payments on them.

Maybe not.

Kevin Erdmann, an author and visiting scholar at the Mercatus Center† has written a fascinating paper about this (available here in full, and required). It is written at a level accessible to undergraduates.

What I like most about this is the careful stock to stock, and flow to flow, comparisons; and also median to median comparisons. From these he builds an argument that the structures themselves could not have been the problem.

  • First, his comparison of the (stock of) houses to the (stock of) population shows a steady or declining ratio from 30 years ago. No problem there.
  • Second, he shows that starts of new homes were in line with population growth. No problem there either.
  • His Figure 3 is more problematic: this sort of chart is difficult to read without distorting one’s view of the data. What seems clear is that there was a shift in the 2000’s out of manufactured homes and into traditional ones. I’m not sure what to make of that. Erdmann sees a decline in multi-family housing there, but I don’t.
  • His Figure 4 shows housing expenditures being steady as a share of income (or declining a bit) over the last 35 years. This result is the opposite of popular perception: people claim housing has gotten more expensive, and it hasn’t in proportional terms. No problem there either.
  • But, he does show in Figure 5 that while median rent and median income (a great comparison) are in line across the country. But what we do have is half-a-dozen cities where both incomes and rents are super high: people are getting paid more to afford housing there. Figure 6 shows that all of those cities do poorly on affordability of housing. No problem there either.
  • Those 6 cities are all well-known for tight housing markets with limited new construction. Figure 7 shows how emmigration from those 6 cities matches up well with immigration into nearby cities without limits on construction. In short, it was like spreading contagion: not enough construction in those 6 cities drove up prices there, so people moved nearby and drove up prices there too. And then people stopped moving as much in 2006. We don’t know why that happened.
  • The last two figures focus on Phoenix, and show that while there was huge immigration into Phoenix, it was matched by construction starts. Then both fell, and vacancies for rentals went up.

Here’s the conclusion: there was no oversupply of housing. There was a big drop in regional migration, but it was matched by reductions in new construction. I am sketchier on Erdmann’s other conclusion: that that there was an undersupply of buyers prior to the financial crisis, and this was transmitted into owners who were unable to sell putting their homes up for rent.

† The Mercatus Center is a libertarian think tank associated with George Mason University. I found Erdmann’s work to be largely free of libertarian positions until the last paragraph which gives an Austrian twist that I’m not sure is merited. The rest of it is solid.

FWIW: lots of us were watching the housing market in the 2000’s. I do remember hearing, more than once, that the age of the U.S. housing stock was older than it ever had been, and that this was motivation for new construction. That fact which was so common 15 years ago has seemingly been forgotten for the last ten.

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