How Wrong I may have been


I read again a post on housing.  (I think I read it before.  I may have even posted it.  the main fact is that you can argue that we are facing a housing shortage.  I had though of the housing supply as excessive for a long-time due to the easy money of the early 2000’s. 

But Karl Smith offers an alternative view.  The boom in housing was not that much.  Check out this graph:

 

FRED Graph

The point is that the growth in population her growth  in houses is at a rate of almost 5 people per house.  If that were to continue it would imply a doubling in household size, and that seems unlikely.

Another implication is that the idea of an excess construction of homes that collapsed as the cause of great recession doesn’t hold up well.  The idea that housing was hammered by tight money does hold up.  Check out this previous post.

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2 responses to “How Wrong I may have been

  1. I think the problem was easy credit (and by extension low interest rates). I’ve read a variety of books trying to understand what happened — one of the best is Joe Nocera and Bethany McLean’s “All the Devils are Here.” It’s pretty clear that demand for mortgages to use to create derivatives pushed up both prices and the number of bad loans. These bonds were ranked AAA but were full of mortgages that could only have been repaid if housing values continued to sky rocket at a pace you don’t find anywhere in history. Adjusted for inflation you can look back to 1900 and housing prices are stable, save the depression/WWII. The rise in prices from 2001 to 2007 was dramatic — a clear bubble.

    Subprime mortgages pushed up values, but even “good” mortgages suffered because they were buying at inflated prices with the expectation of increased value. Moreover, people saw those rising valuations and mistakenly concluded that the “wealth effect” was as good as savings, and used home equity loans (at low interest rates) to further set the stage for a perfect storm. I think, in fact, looking at the massive increase in public, private and corporate debt since 1980 (when debt levels started to increase dramatically), cheap credit is the key cause for the predicament. People point to government debt, but the private sector has been no better.

    So my inclination (recognizing I am not an economist) is to think that monetary policy was too expansionary.

    • I used think this, but as the behavior of housing suggests the drop in home construction wasn’t so large, I’m more inclined to think though interest rates were low, money was tight. That why total spending dropped so much.

      Check out the links.

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