Tuesday, April 10, 2018

My new policy brief at Mercatus

My new policy brief is up at the Mercatus Center.

Most of the content will look familiar to IW readers, but this is probably the best summary of the basic argument - that undersupply of housing caused the housing bubble.


Here is the take-away:
For a decade, the collapse has been treated as if it was inevitable, and the important question seemed to be, What caused the bubble that led to the collapse? This needs to be flipped around. Given the urban housing shortage, it was rising prices that were inevitable. So the important question is, Why did prices and housing starts collapse even though the supply shortage remains? And why were housing starts still at depression levels in 2011?
The surprising answer to those questions may be that a housing bubble didn’t lead to an inevitable recession. It may be that a moral panic developed about building and lending. The policies the public demanded as a result of that moral panic led to a recession that was largely self-inflicted and unnecessary. They also led to an unnecessary housing depression that continues to this day.


  1. - Nonsense. There wasn't an "undersupply" of housing.
    - If you want to know why there was a housing bubble from say 1990 up to 2005 then look at the Baby Boomers. These are the people who are born between 1945 and 1961. These baby boomers were from say 1990 up to say 2005 buying larger houses. And were pushing up house prices higher. Rising prices ALWAYS entices banks to issue more loans/credit and pushing home prices even higher.
    - The US housing bubble deflated simply because home prices became too high (for several reasons).
    - If you want to know more then read the work of Harry S. Dent. Based on demographics he predicted the 2008 crisis.


    1. I thought it was a demand-side phenomenon and that the baby boomers were an explanation at first, too. But, after looking into the data, I changed my mind.

  2. - The babyboom here in the US started in/around 1935, NOT 1945 !!! And peaked in 1961. After 1961 the amount of births declined. Source: Harry S. Dent. (Dent adjusts the birth figures for immigration and emigration)
    - People, in general, move, on average, once in their life to a larger house and that happens the most when they are between 35 and 42 years old. The babyboom generation moved to larger houses (in increasing numbers) from (1935 + 35 =) 1970 to (1961 + 42 =) 2003. The peak of the babyboom was in 1961, so the largest amount of people moved to a larger house in 2003. Using this model Harry Dent predicted around the year 2000 that home prices would start to fall in 2003. Dent was only off 2 years. Because in the 2nd quarter of 2005 indeed homeprices started to go down. And in the 1st quarter of 2006 the amount of housing starts entered a crash that only stopped in 2011/2012/2013.
    - Based on demographic developments, Dent made 3 other prescient predictions. 1) He predicted in the 2nd half of the 1980s that the japanese economy would weaken in the 1990s.
    In 1993 Dent predicted that 2) from 1993/1994 onwards the US would have number of very good economic years but in that same year he also already raised the alarm: 3) the economic "fun" would end in 2008/2009.
    - If one lets the babyboom begin in 1935 then it makes much more sense that the US labor participation rate started to decline in the year (1935 + 65 =) 2000. Think: retirement.