Housing Policy, Monetary Policy, and the Great Recession

70 Pages Posted: 5 Aug 2020

See all articles by Scott Sumner

Scott Sumner

Mercatus Center at George Mason University

Kevin Erdmann

The Mercatus Center at George Mason University

Date Written: August 4, 2020

Abstract

Most research on the run-up in home prices before the Great Recession has focused on types of excessive demand—loose lending, foreign savings, loose monetary policy, speculation, bank deregulation, federal housing subsidies, etc. The focus on excess demand led to fatalism about the collapse in homebuilding that began in 2006 and the eventual recession and financial crisis that followed. Regardless of the sources of excess demand, a consensus developed that American spending had become unsustainably high because of a housing bubble and that demand needed to be reduced. Using a broad array of evidence, we find that constrained supply of new housing in key urban centers was the primary trigger for high home prices before the crisis. The recession and the financial crisis were the result of deliberate contractions of demand—both generally and specifically in residential investment—that were neither useful nor necessary. First, tightening monetary policy reduced aggregate spending and encouraged negative sentiment about real estate. Then, policy changes tightened lending standards and depressed housing markets for years after the 2008 financial crisis. A monetary policy regime targeting stable nominal income growth would have dramatically improved the economy during and after 2008.

Keywords: monetary policy, inflation targeting, market monetarism, Great Recession, global financial crisis, housing bubble, housing supply, bailout, bank regulation, Federal Reserve Board, bank lending, mortgage market

JEL Classification: E3, E6, R3

Suggested Citation

Sumner, Scott and Erdmann, Kevin, Housing Policy, Monetary Policy, and the Great Recession (August 4, 2020). Mercatus Research Series, Available at SSRN: https://ssrn.com/abstract=3667309 or http://dx.doi.org/10.2139/ssrn.3667309

Scott Sumner (Contact Author)

Mercatus Center at George Mason University ( email )

3434 Washington Blvd. 4th Floor
Arlington, VA 22201
United States

Kevin Erdmann

The Mercatus Center at George Mason University ( email )

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
18
Abstract Views
137
PlumX Metrics