Kevin Erdmann on housing in 2006-2008

He responds to my post.

So, in the highest priced cities, middle class buyers were an insignificant part of the market, but when prices in those cities shot up and then collapsed, our main policy response was to prevent middle and lower-middle class households from being homeowners in places like Texas, where they never posed a problem.

Read the whole thing. The main take-away is that if you thought in terms of just one housing market, as policy makers in Washington did, you could not possibly make good decisions.

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19 Responses to Kevin Erdmann on housing in 2006-2008

  1. Handle says:

    The housing market is illegible to centralized policy makers in a manner that is similar to one of the ways the economy is illegible to them. Because there is no singular “the” in “the housing market.” The situation is highly geographically heterogeneous – all real estate is local / location, location, location – and so aggregation fallacies matter and fine granularity is indispensible to accurate analysis.

  2. collin says:

    The main thing I don’t see from Kevin or yourself on government lending decisions is why the lack of buyers after 2008 was the government doing. It is a lot of local regulations which is reasonable but does little to explain non-coastal cities. I would say the main reason why housing has not bounce back as much is because of wage incomes not credit decisions.

    1) The low point of housing mortgage debt was 2012 which to most charts is also the lowpoint of the Great Recession real wage drops. And both mortgage debt and wage increases have had modest increases since 2012. It is is a demand issue here as real wages dropped and it took young people longer to set themselves up. (If you don’t believe then remember wages after the S&L bust wages turned around in 1994/1995 and housing in 1995/1996.)
    2) The economics of red states where there is more cheap housing did better than Blue states until 2012 when commodities hit their high point. Since then many Red states economics have diminished as the commodity prices have been lower since 2012 including oil in 2014. Go look at corn and soybean prices along with the Kansas economy. It was not really the governor fault but the commodity drop.
    3) Somebody has to explain to me why can’t banks and lending institutions lend deeper on the free market? Sure the government can draw to strict of lines but they are not the only possible investors here. I suspect after 2008 investors are more careful on mortgage debt but that is not a government fault.

    I am not saying the government should removing themselves from the mortgage but I don’t see how it is significantly holding up the housing market today.

    • At least until recently (I haven’t seen updated numbers), the average FICO score of rejected applications at FHA and the GSEs is higher than the average approved score was before or during the boom. The shift happened in 2008.

      The CFPB enforces strict guidelines on mortgage standards, which I think now apply to any mortgage originator, which increase liabilities on lenders if mortgages go into default. Many new compliance issues also increase the cost of originating new loans, and if fees or rates are too high, lenders are identified as predatory.

      So, on a $100,000 mortgage, if you’re grossing 4% and netting 1%, and you have a few thousand dollars in compliance costs plus a vague liability tied to the mortgage if the borrower has some default risk, and you run afoul of regulations if you raise fees to make it profitable, how are you going to make that loan?

      In 2008, the GSEs stopped growing mortgages outstanding to FICO scores under about 740, and after that shift, home prices in high tier markets stabilized but home prices in low tier markets collapsed more strongly than they had before that time.

      If you don’t at least find this to be strongly suggestive evidence, then you’re free to disagree.

      • EMichael says:

        Supply and demand.

        Recession with high UE rates coupled with stagnation of incomes certainly is part of the demand fro mortgages after the bust. Combine that with the millions of people(not counting investors) were taken off the market due to delinquency and foreclosure certainly affected demand.

        Meanwhile, amazing people forget that it took $200 Billion to get F&F stable, and that ignores that their losses in 08, 09, 10 and later were going to inhibit their portfolio lending and a raise of 30 Fico points is minimal considering that. On the other side, any of their MBSs were going to be looked at with a large grain of salt by investors unless they were almost gold plated. That is the supply side.

        That is all due to the private market. Don’t believe it? Look at private label MBSs, no one in their right mind would trust those people after seeing the outright fraud they committed and the losses investors took.

        But all you have to do in some forums is throw together a couple of half truths and facades up there about government “policy”(of course without any detail at all), and you are a star.

        “You can lead a horse to water, but a pencil must be lead.” Groucho Marx

        • Octavian says:

          If fraudulent private MBSs caused the housing boom, then why did housing prices skyrocket before private securitization took off rather than the other way around?

          And why do securitized mortgages perform fairly similarly to retained mortgages (Borrowing the link from Kevin’s blog; San Francisco Fed:

          “But all you have to do in some forums is throw together a couple of half truths and facades up there about government “policy”(of course without any detail at all)”
          You’re being disingenuous at best. Many have written in great detail about what specific government policies failed and why. Selgin, Sumner, Glaeser, etc.

          • EMichael says:


            From the one link:

            “We find that privately securitized fixed and adjustable-rate mortgages are riskier ex ante than lender-retained loans or loans securitized through the government sponsored agencies.”

            In terms of the other, see Figure 1 here:


            It is fun dealing with you guys in this area, but fighting straw men is tiring.

          • collin says:

            The first of the housing boom was not MBS but the booming economy of the Dotcom era. Again there was minor housing bust in 1990 (more so in California but not other states) and lasted to 1995. Why did it turn around in 1996? Because real wages with worker participation were increasing in 1995. People could afford more housing in 1997. Housing followed the rest of the markets until 2000 when Dotcom collapsed and we had a minor but very slow moving recession. (The height of unemployment was 2003.)

            So MBS started attracting heavy investment and workers because it was the highest paying are in the economy in 2001. All the MBS issues, sub-prime, investors, etc. were help filling the demand hole for high cost housing starting in ~2003.

            The aspect of the US bubble we should have seen more is something similar happened in Japan starting in 1990. Hell Krugman wrote about endlessly in 2001 – 2005.

      • baconbacon says:

        “So, on a $100,000 mortgage, if you’re grossing 4% and netting 1%, and you have a few thousand dollars in compliance costs plus a vague liability tied to the mortgage if the borrower has some default risk, and you run afoul of regulations if you raise fees to make it profitable, how are you going to make that loan?”

        Simple question, why not just raise the interest rate you are charging then?

      • collin says:

        I feel like it is strong evidence of tight lending with GSEs after 2008 but how much did slow down housing in 2009? I would say 10% compared to 60 -70% of low wages and high unemployment depressing the demand of housing. Again, the low point of US mortgage debt was 2012 which was the low point of real wages in the Great Recession.

        Secondly, I don’t see how GSEs are forcing the private markets from funding FICO scores of 700. That is not cheap or profitable but the government is not stopping it. I don’t see why it if the government fault if investors are shy on mortgage debt.

        • EMichael says:

          I would not argue too much with this. However, I would need to see some show of proof that the “tightening” of the GSEs was the result of policy as opposed to a strict business decision placed on them by the circumstances in 2008.

          One thing to tighten lending because you are told to, another to do so because it is the only way you can operate. Of course, I believe the second reason is operable here, but am open to see some show of proof of the second option.

  3. Lord says:

    I wouldn’t say that is quite accurate, for Texas had in place far more severe restrictions on ownership before than were imposed nationally afterwards. Those restrictions were largely why it wasn’t much of a problem for them.

    • What restrictions are you referring to?

      • EMichael says:

        “Each state has its own laws governing housing finance. These laws have an influence on whether a state’s housing sector is resilient or fragile in the face of an economic downturn. Where residential speculation from 2001 through 2006 was rampant, those states that allowed 100% home equity loans helped fuel consumers desire to spend their equity and use their home as an ATM. Consumers that borrowed 100% spent any cushion of equity that would protect them should values change.

        Before 1997, Texas law did not allow home equity loans (HELs), and home equity lines of credit (HELOCs) weren’t allowed until 2003. When Texas real estate law was finally amended to permit home equity loans, it included some of the strongest consumer protections in the nation. Some of the most significant provisions are:

        The total of all mortgage debt (not just the home equity loan) cannot exceed 80% of the fair market value of the home.
        Only one home equity loan may be made against a home at a time. While additional financing arrangements might be possible, a homeowner cannot obtain a second home equity loan until the first has been paid in full.

        A borrower is only permitted one home equity loan per year, regardless of how quickly the loan is repaid, and a home equity loan may not be converted to another type of loan.
        Land that is taxed as “agricultural” or “open space” may not be used to secure a home equity loan.

        Analysts (Dr. Anil Kumar) at the Dallas Federal Reserve as well as myself believe this played a big factor in the lack of speculation on one’s individual home. This conservative financial stance on home equity helped protect Texas consumers from themselves.”

        • EMichael says:


          While the use of HE loans as “an ATM” was a large factor, we need not to forget the proliferation of 80/20 piggyback loans where the borrower no real cash into the deal and their CLTV was 100% with no mortgage insurance.

        • Lord, is this what you were referring to?

          • Lord says:

            Yes. That, together with higher real estate taxes, made speculation there much less attractive as well as more difficult.

          • Higher property taxes definitely seem to be important for keeping prices less volatile, and they seem to be associated with regions that have more liberal building policies.

          • EMichael says:

            I would suggest a look at the effects of the bubble on the New Jersey shore. The highest property tax state in the country. Though I do not doubt that any expense related to buying a property has an effect.

            Location, location, location.

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