There Was No Housing Bubble in 2008 and There Isn’t One Now

(Bloomberg Opinion) -- Housing markets are red hot, with prices up more than 18% from November 2020 to November 2021. That’s an acceleration over the previous two years, which saw increases of 4% and 8% each. It’s also a faster rate than the U.S. experienced during the housing boom of the 2000s that preceded the Great Recession.

That comparison is causing some heartburn. “Are we in another housing bubble?” asked Mark Zandi, chief economist at Moody’s. The consensus, shared by Zandi, is that the answer is no — or, at least, that today’s bubble is different and less dangerous than the last one. Lending standards are more strict than they were 15 years ago, for example, which ought to mean that fewer homeowners are at risk of defaulting if prices fall.

CNN, though, found a reason for pessimism in that optimism. “The good news is that few economists believe that the current run-up in housing prices is a bubble that's about to burst, taking the economy down with it,” Chris Isidore of CNN Business wrote on Oct. 27, 2021 before adding ominously, “The bad news is that practically no one was worried about the housing bubble in 2007, either.”

But there’s another reason for sanguinity about the current housing boom: We may have misunderstood the last one all along.

The economists David Beckworth and Scott Sumner have argued that the timing of the last housing bust does not line up with the conventional wisdom that it played a central role in the recession that began in December 2007. The housing market peaked in early 2006, and sustained nearly two years of decline before the economy stopped growing as unemployment stayed low.

Kevin Erdmann — the author of a new book about housing, “Building from the Ground Up,” and a colleague of Beckworth and Sumner at George Mason University’s Mercatus Center — has more recently challenged the claim that the U.S. built too many houses back then. He points out that spending on housing didn’t grow any faster than spending on other consumption goods during the boom (or the preceding decades). The notion that the price increases of 2000-2007 were unsustainable, he points out, also doesn’t match the experience of other countries. The U.K. had a larger increase, a shorter and less severe decline, and a stronger rebound.

Erdmann does not deny that average home prices rose too much in some metropolitan areas during that period. But these spikes were a function of too little homebuilding, not too much. Prices rose fast in two types of cities: those with tight constraints on supply (including New York and San Francisco) and those that dealt with an influx of newcomers from those places (such as Phoenix and Miami).

A monetarist explanation for the Great Recession is that the Federal Reserve erred from late 2007 onward by failing to loosen monetary policy enough after initial signs of economic weakness, sending tightening signals to markets as the crisis developed, and then failing again to do what it would take to revive spending levels. That’s what caused a mild decline in housing markets to become a plunge — along with causing a financial crisis and a surge in unemployment and defaults.

What Erdmann adds to the story is that a misdiagnosis of the housing market was one of the reasons for the Fed’s mistakes. Before the crash, Ben Bernanke, then the Fed chair, said that the economy needed “slowing in the housing market” (and not, say, a loosening of restrictions on building). During the weak early years of the recovery, he saw sluggish home construction as a consequence of previous overbuilding, not as a sign that monetary policy needed to change.

This wasn’t an idiosyncratic view on Bernanke’s part. The Fed’s hawkish critics argued that the Fed should have pursued a tighter policy to moderate the pace of housing starts during the boom.

What caused the Great Recession is a complicated question. There is still some debate, after all, about the causes of the Great Depression of the 1930s. It would be unwise to conclude that speculation in housing played no role at all. But it is possible that insufficient supply was, and still is, a bigger problem than excessive demand.

The questions worth asking are not just whether we are in the middle of another national housing bubble, but whether we were ever in one.

More From Other Writers at Bloomberg Opinion:

• A Shrinking U.S. Won’t Fix the Housing Crisis: Conor Sen
• Millennials’ Real Estate FOMO Goes Haywire: Lionel Laurent
• Cracks in the Housing Market Are Starting to Show: Gary Shilling

Erdmann writes: “In both 2005 and 2006, more than 1.5% of Closed Access city residents migrated to other places, net of in-migrants. In the Contagion cities, net in-migration in 2005 was at about 1.5% of the local population.”

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ramesh Ponnuru is a Bloomberg Opinion columnist. He is the editor of the National Review and a fellow at the American Enterprise Institute.

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