RE-AIR - Kevin Erdmann on Housing Shortages and Their Role in the Great Recession

Episode Summary

Executive Summary: Kevin Erdman argues the 2000s housing boom and Great Recession were misread: the U.S. did not have a nationwide housing surplus, but rather a shortage concentrated in high-demand “closed access” cities like New York, Boston, San Francisco, and Los Angeles. Price spikes reflected supply constraints, migration pressures, and policy errors, not broad malinvestment.

Main Topics: Origin of the book and research process (Priority: 4/5): Erdman explains the project began as investment research and evolved over years of data-gathering that repeatedly contradicted the standard bubble narrative. No nationwide housing surplus (Priority: 5/5): He argues housing stock per capita, total units, and inflation-adjusted housing spending do not show an extraordinary boom; the apparent bubble came from misreading aggregate data and focusing on single-family homes. Closed access vs. open access cities (Priority: 5/5): The core framework distinguishes cities with restrictive housing supply and persistent rent growth from cities that build enough housing and remain more elastic. Migration and contagion cities (Priority: 5/5): Population outflows from closed-access cities pushed households into places like Phoenix, Las Vegas, and Florida markets, creating price pressure there despite being secondary destinations rather than credit-driven bubbles. Role of credit and the Fed (Priority: 4/5): Credit expansion mattered at the margin, especially through private securitization and Alt-A lending, but Erdman says the Federal Reserve’s rate hikes in 2006 helped trigger the housing bust by turning homeowners cautious. Policy and economic implications (Priority: 5/5): The conversation links housing shortages to declining dynamism, reduced labor mobility, and broader economic inefficiency, arguing that today’s zoning/NIMBY concerns validate the book’s framework.

Key Arguments: The 2000s did not feature a broad overbuild of housing; measures like housing units per capita and total housing stock show at most small deviations from trend. Focusing on single-family homes created a false impression of excess because other forms—multifamily, manufactured homes, contractor-built units—were ignored. Housing expenditure as a share of income was relatively flat in real terms; Americans were not over-consuming housing so much as being priced out of desirable cities. New York, Boston, San Francisco, and Los Angeles are “closed access cities” where local housing restrictions cap supply and force rents upward. Price growth in those cities reflected persistent rent growth and expected future scarcity, making housing there more like a rent hedge than a speculative bubble. What looked like a nationwide bubble was partly a migration story: households were moving out of expensive coastal cities into cheaper “contagion” cities, creating temporary price pressure there. Phoenix and similar markets were not caused by excess credit at their core; they were absorbing large inflows of households leaving constrained coastal metros. The Federal Reserve’s 2006 tightening helped convert a housing dislocation into a broader recession by signaling that housing wealth was unsafe and by reinforcing expectations of price declines. The true structural problem is urban housing supply restriction; solving financial policy alone cannot fully address the economy’s low dynamism and inequality. Other Anglo economies with similar housing constraints, such as Canada, Australia, and the UK, also experienced ‘bubble-like’ conditions because the core issue is supply, not uniquely American finance.

Data Points: Time spent researching the book: about 3 years - Erdman describes the project as an accidental, multi-year research effort. Date range of initial interest: 2014–2015 - He first looked at homebuilder markets and housing data while thinking like an investor. Housing stock per capita trend: slight bump in the early/mid-2000s, after rising in the 1980s - Used to argue the boom was not exceptional relative to population. Core cities named as closed access: 4 cities - New York City, Boston, San Francisco, and Los Angeles are identified as the main restricted-supply metros. Migration out of closed-access cities: hundreds of thousands of households - Erdman estimates large outflows from key coastal cities around 2005–2006. Outmigration from closed-access cities: about 2% per year - He says homeowners were selling and leaving these cities during 2004–2005. Housing starts in Phoenix: up about 50% over five or six years - Part of the contagion-city boom as it absorbed migrants from coastal California. Phoenix prices: up about 75% over the same period - Used to show prices rose alongside migration-driven demand, not just credit excess. Distressed mortgages by income group: growth concentrated in the top two income quintiles - Shows higher-income borrowers were central to the risky lending boom in closed-access cities. Rent inflation and core inflation: converged around 2% in late 2005 - Presented as the only normal-sounding point in the prior 20 years of shelter inflation dynamics. Typical housing transaction share: about 5–6% of housing stock transacts annually - Used to illustrate that 2% annual homeowner outmigration is a very large selling pressure. Rent inflation since the mid-1980s: consistently above core inflation - Supports the claim that housing scarcity, not excess supply, has driven shelter costs.

Pivotal Quotes: "we had never had too much housing all along. Our problem has been a lack of housing, especially in those particular cities." — Kevin Erdman: Central thesis rejecting the standard housing-overhang narrative. "these cities have devolved back into a limited access order" — Kevin Erdman: Describes how local politics and housing restrictions lock people out of high-opportunity metros. "I would say the Fed caused the housing bust" — Kevin Erdman: His strongest statement on the role of monetary policy in triggering the downturn.

Implications: The episode argues housing policy is central to growth, inequality, and macro stability. If supply constraints remain, rent inflation, migration distortions, and weaker labor mobility will persist; fixing zoning and access matters more than blaming credit cycles alone.