Housing was Undersupplied During the Great Housing Bubble

Abstract

The overriding challenge of the 21st-century economy has not been too much money, too much credit, or too many homes. To the contrary, at the heart of the housing “bubble,” the sense of stagnation, and the sense of inequity is a distressing lack of homes.

In this brief, based on the evidence I presented in my book Shut Out, I argue that we did not have a housing bubble. We had a housing supply bust — first in the places where people want to live, in places where there is more economic opportunity. That supply bust caused prices to rise to extreme levels in those cities — most notably in New York City, Los Angeles, Boston, and San Francisco — metropolitan areas I call the Closed Access cities. After the turn of the century, millions of households flooded out of those cities because of the shortage of housing — so many that they overwhelmed cities in the main destinations for those households, such as inland California, Arizona, and Florida. Then we imposed a credit and monetary bust on the entire country in a misplaced attempt to alleviate the problem.

Policymakers tried to solve that supply problem by imposing a demand bust. The demand bust succeeded so well that a decade later we are still mired in the most depressed period of homebuilding since the Great Depression. Since the demand bust didn’t solve the supply problem in fact, it made it worse — the problems we associate with the bubble are now worse. This has led to rising housing costs, income stagnation and inequality, and labor markets that have been slow to recover.

Keywords: housing finance, housing, Great Recession, mortgages, mortgage finance, housing policy, economic policy, housing supply, home building, home buying

JEL Classification: R20, R31