118 - Kevin Erdmann on Housing Shortages and a New Understanding of the Great Recession

Episode Summary

Executive Summary: Kevin Erdman argues that the early-2000s housing boom and the Great Recession were misread as a credit-fueled overbuild. In his view, the real driver was a long-running shortage of housing in high-opportunity "closed access" cities, which pushed households into migration patterns that distorted national data and policy responses.

Main Topics: Origin of the book and research process (Priority: 4/5): Erdman describes the project as accidental: he began by looking for housing-market mispricings as an investor, but repeated data checks overturned the standard bubble narrative. Housing shortage vs. housing surplus (Priority: 5/5): The core thesis is that the U.S. had too little housing, especially in high-demand urban markets, not too much housing in 2005. Misreading the situation led policymakers to manage the economy as if there were an overhang. Closed access cities and urban supply constraints (Priority: 5/5): New York, Los Angeles, Boston, and San Francisco are presented as cities with very low housing construction, high rents, and restricted access that prevent labor mobility and concentrate income. Contagion cities and migration spillovers (Priority: 5/5): Phoenix, Las Vegas, inland California, Florida, and similar metros absorbed households priced out of closed-access cities. Their booms reflected migration pressure rather than pure speculative excess. Rethinking prices, rents, and the role of credit (Priority: 4/5): Erdman argues national price-to-rent distortions were driven mainly by rising rents in a few constrained metros, while credit expansion was secondary and often involved high-income borrowers hedging housing risk. Policy error and the Great Recession (Priority: 5/5): The Fed’s rate hikes and subsequent dismissal of the housing dislocation helped turn a housing shortage and migration shift into a broader macro crisis by reinforcing the belief that a correction was necessary. Broader implications for dynamism and inequality (Priority: 4/5): The housing shortage is linked to weaker labor mobility, lower economic dynamism, higher inequality, and the need for zoning and land-use reform in the U.S. and other Anglosphere countries.

Key Arguments: The standard story of a housing oversupply in 2005 is wrong; aggregate housing units per capita and total housing measures do not show a major national glut. Single-family housing starts looked extreme only because analysts ignored multifamily, manufactured, and owner-built housing categories. Real housing consumption has been flat or falling relative to income since the 1980s, while rent inflation has concentrated in a few major metros. Closed access cities are constrained by local politics and zoning, turning housing into a scarce asset and limiting migration into high-productivity labor markets. Migration out of closed-access cities and into contagion cities explains much of the apparent national housing boom. Price increases in boom metros largely reflected higher rents and persistent scarcity, not a temporary credit-driven bubble. The Fed’s rate hikes in 2004-2006 worsened the situation by signaling that housing was overvalued and unsafe, accelerating the withdrawal from housing as an asset. The recession was amplified because policymakers treated the situation as a correction to excess supply instead of a shortage-induced dislocation. The apparent national housing bubble was partly a bidding war for access to productive urban economies, making high prices a normal feature of a second-best world. The U.S. should focus on expanding housing supply and ending its fixation on a surplus narrative rather than assuming all rising house prices imply speculation.

Data Points: Housing units per capita: Rose in the 1980s, then was fairly level and only slightly higher in the early-to-mid 2000s - Used to argue there was no large national housing glut Closed access cities: 4 major cities: New York, Los Angeles, Boston, San Francisco - Primary metros with severe housing constraints and very low housing starts Additional cities mentioned: Seattle and Washington built more than the national average; San Diego, Honolulu partly similar - Used to distinguish true closed-access cities from high-cost but still-building metros Migration out of major cities: About 200,000 to 300,000 households in the year leading into 2006 - Estimated outflow from New York, Boston, San Francisco, and Los Angeles due to housing scarcity Closed-access outmigration: About 2% per year of the housing stock as net outmigration of homeowners - Presented as large selling pressure in those metros during 2004-2005 Phoenix housing permits: Up about 50% over five or six years - Example of a contagion city absorbing housing demand from coastal metros Phoenix prices: Up about 75% over the same period - Used to show why the market looked like a bubble despite migration-driven demand Real housing spending share: Roughly 12% of GDP in rent terms, or about 18% of income data - Illustrates housing’s budget share and the difference between rent and price measurement Rent inflation: Persistently above core inflation for the last 20+ years; converged around 2% in late 2005 - Shows shelter costs as a major part of measured inflation and the relative normality of the 2005 peak Housing starts collapse: Began around early 2006 - Observed across the country, around the time the Fed’s policy rate peaked and the yield curve inverted Price stability after starts collapse: Prices stayed relatively flat for about 18 months - Used to argue prices did not need to fall immediately and that the bust was policy/model driven Core inflation composition: Close to half of measured core inflation coming from shelter inflation - Supports the claim that housing scarcity is central to macro inflation dynamics Metro rent-price relationship: Rents became persistent outliers in the mid-1990s to 2000s - Explains why price-to-rent ratios rose in constrained coastal cities

Pivotal Quotes: "There actually has never been too much housing. All along, our problem has been a lack of housing, especially in those particular cities." — Kevin Erdman: Core thesis rejecting the housing-surplus narrative "We're in this new epoch... this new wave of urbanization that's really required just by the state of technology, the state of culture, the state of the economy today." — Kevin Erdman: Explaining why urban housing demand is structurally higher in the modern economy "We're running an economy in the third best state. Or fourth." — Kevin Erdman: Summarizing the welfare loss from avoiding the second-best housing equilibrium

Implications: Listeners should view housing as a supply and mobility problem, not just a credit bubble. For policy and industry, zoning reform and greater urban housing construction are central to restoring growth, affordability, and labor dynamism.