Shut Out: How a Housing Shortage Caused the Great Recession and Crippled Our Economy

by Kevin Erdmann

Overview

The United States suffers from a shortage of well-placed homes. This was true even at the peak of the housing boom in 2005. Using a broad array of evidence on housing inflation, income, migration, homeownership trends, and international comparisons, Shut Out demonstrates that high home prices have been largely caused by the constrained housing supply in a handful of magnet cities leading the new economy.

The same phenomenon is occurring in leading countries across the globe. Gentrifying cities have become exclusionary bastions in the new postindustrial economy. The US housing bubble that peaked in 2005 is more accurately described as a refugee crisis than a credit bubble. Surging demand for limited urban housing triggered a spike of migration away from the magnet cities among households with moderate and lower incomes who could no longer afford to remain, causing a brief contagion of high prices in the cities where the migrants moved.

In this book, author Kevin Erdmann observes that the housing bubble has been broadly and incorrectly attributed to various “excesses.” Policymakers and economists concluded that our key challenge was that we had built too many homes. This misdiagnosis of the problem, according to Erdmann, led to misguided public polices, which were the primary cause of the subsequent financial crisis. A sort of moral panic about supposed excesses in home lending and construction led to destabilizing monetary and regulatory decisions. As the economy slumped, a sense of fatalism prevented the government from responding appropriately to the worsening situation.

Shut Out provides a much-needed correction to the causes and consequences of financial crises and secular stagnation.

Product Details

ISBN-13:	9781538122143
Publisher:	Rowman & Littlefield Publishers, Inc.
Publication date:	01/21/2019
Series:	Mercatus Center at George Mason University Series
Pages:	322
Product dimensions:	6.00(w) x 9.10(h) x 1.00(d)

About the Author

Kevin Erdmann was a small business owner for 17 years. In 2010, he sold his business and earned his master’s degree in finance from the University of Arizona, which grounded his real-world experience of investing in the rigor of the academy.

In 2013, he began blogging at idiosyncraticwhisk.com to share his contrarian observations about investment strategies and research. He was surprised to uncover evidence that seemed to contradict conventional narrative and common assumptions about the housing bubble and the financial crisis. As the evidence accumulated, he developed a new account of the causes of the housing bubble and financial crisis. That account eventually became a two-book project, Shut Out and a follow-up book still in development, both of which synthesize and expand on the housing theories he originally published on his blog.

He lives in Gilbert, Arizona, with his wife and three children.

Table of Contents

Introduction 1

Part I The Things We Didn't Know and the Things We knew That Just Weren't So

Chapter 1 High Home Prices Are Caused Limited Supply 13

Chapter 2 Our Unexceptional Bubble 43

Chapter 3 A Tale of Credit 67

Part II What Really Happened

Chapter 4 How Rising Prices Cause More Rising Prices 91

Chapter 5 Migration and Contagion Cities 109

Part III Symptoms of the Urban Housing Shortage

Chapter 6 Closed Access to Labor 139

Chapter 7 Broader Economic Implications of Closed Access Cities 149

Chapter 8 Closed Access and International Trade 181

Chapter 9 A Moral Panic and a Financial Crisis 199

Epilogue 221

Appendix: Home Prices 243

Notes 273

About the Author 307

Acknowledments 307

Editorial Reviews

Even readers convinced by Erdmann’s analysis of the housing market may find this inadequate as a narrative of the financial crisis. Nevertheless, that may be too much to expect of one book. Shut Out is still a provocative and illuminating read, which covers far more ground than this review, mostly on the causes and consequences of closed access cities. Erdmann, interestingly, is not a PhD economist, but a former small business owner with a master’s in finance. As a member of the PhD tribe, I occasionally found myself wishing for more equations and regression coefficients, and simpler charts. But still, somebody should give him an honorary degree.

Economic Record

Kevin Erdmann challenges the most well-known explanations for the housing crash. He argues that the bust, rather than the boom, is the truly exceptional story—a result of excessive restrictive credit policy, borne out a lack of understanding of what caused the boom. One needn’t agree with his story in full to see that he scores extremely important points and adds a perspective that has been missing from discussions and public policy responses to the housing crash. Fixing supply constraints in rich areas, Erdmann shows, will not only make us richer by allowing people to move to areas where they can get higher wages; it will also make our economy sturdier and less prone to the type of disasters that set back the national and, indeed, the world economy in 2007–08.

David Schleicher

Kevin Erdmann has put forward the radical thesis that restrictions on housing supply have been at the center of America’s macroeconomic dilemmas, in addition to raising the cost of living for ordinary Americans. This is one of the few truly new ideas in the debate over the Great Recession. While I still am not sure how much I agree, I find myself thinking about Kevin’s ideas often, and they grow on my mind. Kevin has poured his heart and soul into making the case in this fascinating new book.

Tyler Cowen

Do you believe that you know what happened during the housing bubble and bust? Think again. Kevin Erdmann has amassed a wealth of fascinating data that sheds new light on what actually went wrong with America’s housing market. The basic problem was not too much building or too much lending to low-income people, but rather restrictive housing-development laws pushed people out of ‘closed-access cities’ on the two coasts and into the ‘contagion cities’ in Arizona, Nevada, and Florida that were the epicenter of the housing boom. This book sheds important new light on a number of issues beyond housing, including monetary policy, income inequality, and international investment flows.

Scott Sumner