Beckworth interviews Erdmann

David Beckworth has now done over 100 podcasts, but the recent interview with Kevin Erdmann would easily make the top ten in terms of general interest.  Kevin has a new book coming out soon (as well as a planned follow-up book), which put together many of the ideas in his blog posts on the real estate bubble and bust.  The podcast necessarily only covers a portion of this material, and I’ll just discuss a portion of the podcast.  But you should definitely get the book when it comes out, as it is loaded with lots of fascinating information that goes against the conventional wisdom.  And that’s because Kevin actually took the time to take a close look at the data.

One big theme is the “closed access” cities such as NYC, LA, the SF Bay Area and Boston.  These are the heart of the new, high-skilled information economy.  For the first time in history, however, we have been seeing people fleeing the engines of prosperity.  This is because of tight building restrictions that force out lower income workers as professionals move in, searching for jobs.  This worsens the economic prospects of low-income workers, and makes our overall economy less productive.

Another theme is that the housing bubble has been misinterpreted.  During the boom, it was higher income people who got the vast majority of mortgages in the closed access cities.  Large numbers of lower and moderate-income people were priced out and fled to the “contagion cities” such as Phoenix, Vegas, Riverside, Tampa and Miami, pushing up prices in those markets.  Contrary to what people assumed at the time, the high prices in closed access cities were not a bubble, rather a rational response to actual and expected rent inflation.  Consistent with Kevin’s view, prices in these cities have returned to bubble highs, despite the headwind of tighter lending standards than during 2006.  There were certainly not too many houses being built in those areas during the boom, rather NIMBYism caused too little construction.  And even in places like Phoenix it’s not clear the main problem was too many houses, as rent inflation kept rising even after the bubble burst.  At the national level, housing construction was not unusually high during the boom years, if you account for all types of housing.  Rather housing construction has been unusually low since 2007.

This is just the tip of the iceberg of Kevin’s work.  I believe Kevin’s story is basically correct, although I interpret the early housing bust (2006-07) slightly differently.  We both agree that tight money depressed housing prices during 2008-12, but Kevin thinks the Fed became a problem in 2006, partly due to somewhat tight money and partly due to Fed communication that the housing market had excesses that could lead to a substantial price drop.  I put a bit more weight on the post-2006 drop in expected future immigration.  The expected US population in 2050 is now 50 million lower than what the Census Bureau expected back in 2006, and 40 million of that decline had occurred by 2012.  The decline is mostly due to lower expected rates of immigration, although a falling birthrate also plays a role.  Recall that 2006 is the year that Bush’s immigration reform project failed and border controls were tightened.  Since then, net immigration from places like Mexico has fallen to a trickle, and it was this immigration that was helping to underpin the housing markets in the contagion cities.

I presume that immigration was not the only issue, but it might help to explain why housing began falling a bit earlier than NGDP growth.

PS.  Kevin’s book will be entitled: Locked Out: How the Shortage of Urban Housing is Wrecking our Economy



15 Responses to “Beckworth interviews Erdmann”

  1. Gravatar of Jim Jim
    10. August 2018 at 13:00

    There’s just so many issues working against building new houses in SF, NYC etc. even if you got rid of the zoning laws, you’d quickly need new public transit, which is hindered by a whole other set of issues (2nd ave subway in NYC was like $1.5B per mile).

    I’d heard that the bay area could easily handle 2x or 3x its current population if it replaced all those 2 story houses with 20-30 story skyscrapers. Final Sale costs (currently $1000+/sq ft) would approach construction costs ($300/sq ft). but then how do you build cheap new subways there to handle all these people?

    wish it wasn’t this way but don’t see it changing much at all.

  2. Gravatar of ssumner ssumner
    10. August 2018 at 13:04

    Jim, You asked:

    “but then how do you build cheap new subways there to handle all these people?”

    Simple, bring in Chinese construction firms and Chinese workers. Heck, even the Europeans build the lines at 1/3 the cost of the US

  3. Gravatar of bill bill
    10. August 2018 at 14:29

    I really look forward to Kevin’s book. I love his blog.

  4. Gravatar of ChargerCarl ChargerCarl
    10. August 2018 at 15:51


    Even at inflated US costs those projects would still pencil from a cost/rider perspective.

    NYC really is in its own stratosphere too. Both LA and SF build much cheaper.

  5. Gravatar of Benjamin Cole Benjamin Cole
    10. August 2018 at 17:24

    All hail Kevin Erdmann!

    On house prices, there may be more to the story, though I think Erdmann gets the lion’s share of the story correct.

    There have been several studies that nations that run current-account trade deficits have house price explosions, this one published by the NY Fed:

    The IMF just echoed the Fed to some extent with its July report, and warned that the nations running large current-account traded deficits have consequent elevated asset prices that may suddenly decline:

    The short story is global capital is seeking a home in the US. Foreign investors like safety in a strange land, and seek government bonds or property.

    It is worth noting that after mainland China instituted capital controls (preventing capital from leaving China), and Vancouver and Canada placed various taxes on foreign buying of homes, that house prices in Vancouver fell by 50%.

    In the case of Vancouver, foreign demand for housing was a large factor.

    But in the main Erdmann is right (and heroically so), and it is property zoning, and the homeowner-neighborhood embrace of property zoning, that is the big anti-free market cause of elevated house prices.

    In free markets you have the invisible hand; in US property markets you have the invisible man: property zoning.

    This is NIMBYism, and that is one way to look at it.

    But it can also be viewed as the propertied-financial class restricting competition for the usual reasons—and for banks, it feels safer to lend on property when the supply is fixed by law, no?

    Sure, there are frizzy-haired washed-up socialists who are “against developers.” But let’s not kid ourselves. Long ago, a rentier-financial class figured out how to use property zoning to great effect and results. (The rentiers are always more cunning than the socialists, no?)

    Notice how rarely “libertarian” websites rant against property zoning.

    I will engage in the wonderful indulgence of quoting myself, and conclude with the sentiment, “In foxholes there are no atheists, and when neighborhood property zoning is under review, there are no libertarians.”

  6. Gravatar of Benjamin Cole Benjamin Cole
    10. August 2018 at 18:01

    Add on:

    I hate to say it but….

    1) If what Scott Sumner says is true and lowered expected immigration rates are cooling off house prices….

    2) and if what the Fed says is true, and current-account trade deficits/foreign capital inflows tend to balloon house prices….

    3) then, given the immovable mountain that is property zoning, and the reality that new housing supply will be curtailed for the foreseeable future….

    Gadzooks, is that guy with the big orange ‘do onto something?

  7. Gravatar of ssumner ssumner
    10. August 2018 at 20:21

    Ben, You said:

    “It is worth noting that after mainland China instituted capital controls (preventing capital from leaving China), and Vancouver and Canada placed various taxes on foreign buying of homes, that house prices in Vancouver fell by 50%.”

    Nope, never happened. Please stop the fake news.

  8. Gravatar of Benjamin Cole Benjamin Cole
    11. August 2018 at 04:27

    Scott Sumner–I do not understand your comment.

    China has been toughening capital controls…I assume you do not dispute that. If so, talk to David Beckworth.

    “Vancouver house prices cracked after China toughened capital controls”

    Demand for multi-million dollar dwellings in Metro Vancouver is falling. “All the high-end stuff is sluggish,” says Vancouver realtor-analyst Steve Saretsky.

    ‘Vancouver locals selling $3 million bungalows are going to have trouble finding an alternative to foreign urban land buyers, so prices need to be slashed,’ says Stephen Punwasi. MARK VAN MANEN / VANCOUVER SUN
    Sales volumes and prices on detached houses are especially dropping on the west side of Vancouver, in Richmond and in West Vancouver, where Mainland Chinese buyers had been active buying and building mansions.

    Real Estate Association of Greater Vancouver figures show the median price of a detached home is down more than $500,000 since February, to $1.7 million.”


    “China’s new strict controls on capital leaving the country appear to be popping Metro Vancouver’s high-end real estate bubble.”

    The author of Millionaire Migrants was one the first to provide evidence that the foreign real-estate dreams of China’s wealthy have arguably had more impact than anything on Metro Vancouver’s housing unaffordability.

    UBC geographer David Ley, along with SFU’s Wu Qiyan, told me early this year the city’s real-estate bubble would be punctured when leaders of the People’s Republic of China further restrict money leaving their country.

    Now strong signs are appearing that Metro Vancouver’s real-estate balloon has indeed been pricked by China’s heightened capital controls.”


    Okay, maybe the Canadian scholars are wrong, but my subscribing to their views is not “fake news.”

    Here is the story on Vancouver taxing foreign home buyers….

    “In the struggle to get its red-hot housing market under control, Vancouver targets Chinese buyers”

    By Eshe Nelson for Quartz

    February 21, 2018

    “A year and a half after Vancouver imposed a 15% tax on foreign home buyers, the regional government is once again raising the barriers for out-of-town investors as property prices accelerate.

    The Canadian city has one of the hottest property markets in the world, and early last year the tax (and other measures to restrict domestic lending) seemed to cool down the market. The hope was that the tax would deter overseas buyers—including many Chinese—who were taking advantage of the weak Canadian dollar to purchase investment properties. But in the past five months, year-over-year house price gains have returned to double-digit percentages.”


    Okay, so 1) China toughened up on capital controls, 2) Vancouver slaps a 15% tax on foreign buyers and 3) house prices fall from $1.7 mil to $1.2 million…

    Okay maybe not a 50% drop….only $500,000 down from $1.7 million…btw, there appears to be multiple median and average house price surveys printed for Vancouver…sales are way down too…so maybe Vancouver house prices have not bottomed yet….

    In any event, I think the the smudge-charge of “fake news” has not stuck to my shining escutcheon…..

  9. Gravatar of Brian Brian
    11. August 2018 at 07:06

    Benjamin Cole: You’re still wrong. First of all your source said the price fell to $1.7M not that it fell from $1.7M so the percentage difference of 0.5M is less than otherwise calculated. Secondly you can see there was very little decrease in prices in this chart linked here. Interestingly in the past 5 years there is not even negative change on a 12 month basis so if you remove seasonality the ascent of prices would be even smoother than depicted.

  10. Gravatar of ssumner ssumner
    11. August 2018 at 08:12

    Ben, Vancouver home prices are down around 5% or 10%. That’s tiny, after the huge increase. Please find some reputable data sources.

    Thanks Brian.

  11. Gravatar of Jim Jim
    11. August 2018 at 12:42


    Do you have any data on expanding BART in SF? My understanding is that it was very expensive. In order to really increase SF’s population, BART Would have to go in a loop out near north beach them loop around to sunset?

    I know the NYC 2nd avenue subway cost something like $60,000 per weekday rider ($2.4B per mile). that seems like difficult math to make work.

    This link below says BART would cost $3 Billion a mile and might have even worse $ per rider numbers?

    how realistic is getting Chinese laborers here to work on the subways. even if they did, I’d have to imagine there wages would go up a ton and final costs would be the close to the same? just a guess though….

  12. Gravatar of ssumner ssumner
    11. August 2018 at 16:22

    Jim, You said:

    “how realistic is getting Chinese laborers here to work on the subways. even if they did, I’d have to imagine there wages would go up a ton and final costs would be the close to the same? just a guess though….”

    That’s not how they do things in China. The workers don’t live in ordinary housing units, they live in temporary prefab units, which might be put up in a parking lot or some other empty piece of land. The workers are from the countryside; they don’t earn Beijing/Shanghai wages.

  13. Gravatar of John Hall John Hall
    14. August 2018 at 05:03

    Finally got around to listening to the podcast. The podcast seemed to focus on the housing market with little focus on real estate securities (CMOs, etc.). Hopefully the book also discusses losses on these securities as well as uncertainty surrounding the values of these assets was a big part of the run of the banking system.

  14. Gravatar of Kevin Erdmann Kevin Erdmann
    15. August 2018 at 08:12

    John, I don’t get into them much until the follow up book. Mainly, I would reframe them as being entirely a product of the bust. It wasn’t understood at the time, because the bubble narrative was so entrenched. But, CMOs had nothing to do with the book. The market only ballooned because there was already a mass exodus of capital out of home equity, which was a large source of demand for AAA securities.

  15. Gravatar of Kevin Erdmann Kevin Erdmann
    15. August 2018 at 08:12

    Sorry. Should be “boom” not “book”.

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