Housing, Liquidity, and Closed-Access Cities with Kevin Erdmann

Episode Summary

Executive Summary: Kevin Erdman argues the housing crisis is mainly a supply-and-access problem, not a story of reckless overbuilding. He distinguishes closed-access cities with binding growth limits from open-access cities where migration and construction shifted after 2006. He says policy responses after the bust tightened credit and damaged liquidity, worsening the collapse and leaving low-tier housing and labor markets still constrained.

Main Topics: Closed-access vs. open-access cities (Priority: 5/5): Erdman’s core framework divides housing markets into cities that severely restrict expansion (e.g., New York, San Francisco, Los Angeles, Boston) and cities that can build more easily. This distinction explains different price, migration, and bust patterns. Migration-driven housing dynamics (Priority: 5/5): He argues the bubble era was shaped by people moving out of expensive closed-access cities and into open-access “contagion” cities such as Phoenix, Las Vegas, California, and Florida, where construction and prices rose as housing demand shifted geographically. Why the bubble narrative is misread (Priority: 5/5): Erdman rejects the idea that the crisis was simply caused by too many houses or irrational speculation. He says rents remained strong through the supposed bust period and that prices in high-rent closed-access cities were fundamentally justified. Liquidity and the mortgage-market collapse (Priority: 5/5): He describes the post-2006/2008 crisis as a series of liquidity shocks: reduced first-time buyers, collapse of subprime and securitization markets, then tighter lending after Fannie/Freddie conservatorship. He sees policy as amplifying the downturn. The public-good role of mortgage credit (Priority: 4/5): Erdman frames credit and liquidity as public goods that support economic transactions. By overreacting to the bubble, policymakers imposed unnecessary credit scarcity that reduced homeownership and market functioning, especially at the low end. Housing, labor markets, and access (Priority: 4/5): He links housing shortages in productive cities to broader labor-market inefficiency: workers who should move to dynamic metros cannot afford to, lowering aggregate productivity and limiting access to nontradable jobs that cluster in those cities. International parallels (Priority: 4/5): He argues the pattern is not uniquely American. Housing crises in London, Toronto, Sydney, Vancouver, and similar cities point to a common global issue: dense, high-demand urban cores facing political and regulatory constraints on supply.

Key Arguments: The housing bubble cannot be understood without separating closed-access cities from open-access cities; they experienced opposite migration and price dynamics. High prices in closed-access cities were largely justified by high rents and strong demand, not pure speculative excess. There was never a true period of “too many houses” nationally; in many places rent inflation stayed high even as the bust was underway. The first signs of crisis were liquidity problems, visible in the shift from new mortgages to securitizing existing mortgages once new borrowers dried up. The tightening after 2008—especially around Fannie/Freddie conservatorship—reduced access to mortgages and deepened price declines in lower-tier markets. The crisis narrative wrongly assumes American exceptionalism; similar housing patterns appeared in Canada, Australia, the UK, and other countries. Housing supply constraints in high-productivity cities reduce labor mobility, keeping workers out of the places where their productivity and wages would be highest. Policies that aim to protect affordability by restricting access often end up worsening affordability and reducing economic opportunity. Demand-side explanations of housing booms often implicitly assume inelastic supply; once supply is allowed to respond, many alleged “bubbles” disappear. The most important policy question is whether a rule increases or decreases access—to housing, capital, and labor markets. The real winners from limited supply are incumbent owners; the real losers are would-be entrants and workers priced out of productive cities.

Data Points: Housing blog series: Housing Part 239 - Referenced as part of Kevin Erdman’s long-running blog series and book project. Core closed-access cities: 4-5 cities - He names New York, San Francisco, Los Angeles, Boston, and possibly San Diego as the main closed-access cities. Time of housing peak: End of 2005 - Erdman says housing starts and the bubble peaked around late 2005. Housing starts decline: First half of 2006 - He notes housing starts dropped everywhere beginning in early 2006. First-time homebuyers: Fairly stable since the mid-1990s - He uses this to argue there was not a surge in new homeowner demand preceding the bust. FICO score change after conservatorship: About 40-50 points higher - He says average FICO scores for mortgages rose sharply after Fannie/Freddie were taken into conservatorship. Price decline relative to peers: 20-30% - He says post-2006 home prices in the U.S. and in comparable city/country groups were down by roughly this amount relative to peers. Rent inflation during downturn: Still high in 2006-2007 - Used to argue the bust was not driven by oversupply collapsing rents. Mortgage expense vs. rent: Well below rent for low-tier homes - He argues many low-end households could own for less than they pay in rent. Housing cost burden: 50-70% of income - He says many low-income renters are spending this share of income on rent in high-cost cities.

Pivotal Quotes: "liquidity is a public good" — Kevin Erdman: He uses this phrase to argue that credit market functioning benefits the whole economy and should not be unnecessarily restricted. "we imposed a liquidity crisis on ourselves because we drew the wrong conclusions from the housing boom and bust" — Kevin Erdman: Summarizes his view that policy responses after 2006-2008 worsened the downturn instead of correcting it. "the first question anyone needs to ask about policies. Is this improving access?" — Kevin Erdman: His closing policy framework for evaluating housing, credit, and labor-market interventions.

Implications: Listeners should view housing crises as access-and-supply problems, not just credit excesses. For policy, Erdman suggests expanding housing, mortgage, and labor-market access may improve affordability, mobility, and growth more effectively than restriction-based fixes.