so much that housing in those areas is virtually unaffordable for people in the lower- and middle-income classes. His other message is more controversial: the financial crisis last decade was not due to a housing bubble but, rather, to bad policy decisions based on the idea that there had been a bubble. Whereas I was already convinced of his first point, I, like the majority of economists, was skeptical of his second. But because of all the data and reasoning he brings to the issue, I now find myself at least 90% convinced.

Probably because his second point is the more controversial, Erdmann spends roughly the first half of the book making that case. At times his narrative gets bogged down and his language is often sloppy. For example, he uses the word “shortage” to refer to a situation where demand increases but supply doesn’t. Economists, however, tend to reserve that word for situations where the price fails to clear the market such that quantity demanded exceeds the quantity supplied. The good news is that he often saves the day with pithy, clever quotes that sum up his message. Also, the more than 100 graphs he uses in the book seem like overkill, but that is better than underkill.

Types of cities / Erdmann makes his case by looking at the diverse characteristics of U.S. cities rather than lumping them all together, and by studying changes in housing prices and rents over time. He focuses on the 20 largest U.S. metropolitan areas and divides them into four categories: Closed Access cities, Contagion cities, Open Access cities, and Uncategorized cities. The five Closed Access cities are New York City, Los Angeles, Boston, San Francisco (including San Jose), and San Diego. In those cities, local and state governments have imposed strong restrictions on construction.

Erdmann seems a little vague about when those restrictions got really tight. His narrative suggests that it was in the 1990s, but there’s no index to help one look for a clear answer; he did confirm in an email to me that he dates it to 1995. In those cities, housing starts, even in economic expansions, have been low, incomes have been high, rents have been high (and rising) even relative to incomes, and there were large rates of out-migration of households with low incomes.

The four Contagion cities are Miami, Riverside, CA, Phoenix, and Tampa. Why does Erdmann call them Contagion cities? Because the price increases in the Closed Access cities caused a massive number of lower- and middle-income people to move from them to the Contagion cities where they could afford housing, and bid up housing prices there to the point where they are still affordable but less so than before.

The Open Access cities are Dallas–Fort Worth, Houston, and Atlanta. Erdmann explains, “These growing cities are able to build enough new homes to meet demand.” By “able,” he means that builders were allowed to build, not hemmed in by government restrictions as in the Closed Access cities. By “meet demand,” he means that the increase in the quantity supplied at a roughly constant inflation-adjusted price equaled the increase in quantity demanded.

The last group, Uncategorized cities, are Chicago, Philadelphia, Washington, Detroit, Seattle, Minneapolis, St. Louis, and Baltimore. Washington, Seattle, and Chicago, writes Erdmann, “are dealing with the same pressures that the Closed Access cities are.” Housing costs (by which he means prices) have increased but at the metropolitan level, housing starts are much higher than in Closed Access cities, “housing costs as a proportion of income are near national norms,” and domestic migration out of them isn’t as extreme as for Closed Access cities. Even though Erdmann writes in the present tense, presumably he means to use the past tense given that his narrative is about the past. In St. Louis and Detroit, housing permits issued were higher than in the major Closed Access cities.

Why choose just 20 cities total? Erdmann explains in a footnote that these 20 cities “capture the bulk of the aggregate story.” That seems reasonable.

Challenging the standard story / The standard story that most people, including economists, have accepted about last decade is that the rise in home prices was fueled by an expansion of credit and that both borrowers and lenders naively expected the growth in home prices to continue.

Erdmann rejects this story with a complex analysis that considers many factors. In his introduction to the book, he nicely summarizes his thesis, writing:

These findings suggest that we did not have a housing bubble. We had a housing supply bust — first in the places where people want to live, in places where there is more opportunity. That supply bust caused prices to rise in those cities — most notably in New York City, Los Angeles, Boston, and San Francisco — metropolitan areas I call the Closed Access cities. After the turn of the century, millions of households flooded out of those cities because of the shortage of housing — so many that they overwhelmed cities in the main destinations for those households, such as inland California, Arizona, and Florida. Then we imposed a credit and monetary bust on the entire country in a misplaced attempt to alleviate the problem.

Erdmann has many objections to the standard narrative. One thread of the narrative is that subprime lending was a major contributor to the increase in the U.S. homeownership rate from 64% in 1994 to an all-time high of 69.2% in 2004. Erdmann claims that subprime lending was not an important factor. Why? If it were an important cause of higher homeownership, he argues, there should have been a fairly pronounced correlation between the homeownership rate and housing prices. There wasn’t. He points out that homeownership had risen to 66.5% by late 1998, halfway to its peak, while real home prices were still about the same.

In the standard story, subprime mortgages were granted to relatively low-income families that were unwise to buy houses but were able to do so because of lax lending standards. But, notes Erdmann, between 1995 and 2004, the huge increase in new owners was among people in the top two income quintiles. For the top quintile, he notes, over 40% of non-owners became owners versus about a 20% increase for the middle quintile and virtually no change in the bottom two quintiles. That doesn’t fit the standard narrative.

Erdmann cites an August 2017 working paper by Stefania Albanesi, Giacomo De Giorgi, and Jaromir Nosal on the characteristics of individual borrowers. Even in ZIP codes with high levels of subprime lending, they found, borrowers tended to have higher credit scores. Also, the debt growth for borrowers with lower credit scores, writes Erdmann, “tended to be among young borrowers who subsequently maintained rising incomes and rising credit scores.” The bottom line, he writes, is that “there was no shift to high credit risks during the housing boom.”

Another part of the standard story involves so-called “liar loans”: mortgages requiring little documentation that ostensibly were made by predatory lenders to naive borrowers who did not understand the terms. Erdmann quotes a study by Federal Reserve Bank of Chicago economist Gene Amromin finding that these loans went primarily to high-income households with high credit ratings. The borrowers, according to Amromin, expected both their incomes and their house prices to grow. While he and Erdmann both dismiss the idea that these borrowers were naive, I do think it’s naive to expect house prices always to rise. But Amromin and Erdmann’s point seems to be that they were not so naive as to not understand the terms of the loan. That is probably correct.

Another part of the standard story is that private securitizations of mortgages resulted in ample lending, producing rising homeownership and house prices. Erdmann shows that the timing for this doesn’t fit the narrative. He has a graph showing that most of the boom in private securitizations, which happened between the second quarter of 2004 and the end of 2006, came after the rise in homeownership, which peaked in the second quarter of 2004. For the increase in private securitization of mortgages to be a major cause of the boom in homeownership, most of it would have had to happen just before or at the same time as the increase in ownership.

In a chapter on migration between cities, Erdmann notes that for his story about migration from and to Closed Access cities to make sense, people in those cities who have families would move out and be replaced by people with fewer children. Sure enough, federal tax data show that households moving into Closed Access cities had 0.2 fewer members per household than households moving out. That sounds small, but it’s one-third of the drop in the average size of an American family between the 1960s and 2018.

Tight money, tight housing markets / In one of the final chapters, “A Moral Panic and a Financial Crisis,” Erdmann shows that the Federal Reserve responded to the financial crisis not by flooding the market with liquidity, as Alan Greenspan did after the 1987 stock market crash, but by bailing out particular financial institutions and then sopping up the added liquidity by selling bonds. The technical term for what the Fed did is “sterilization.”

Erdmann could have strengthened his case by pointing to the well-developed economics literature on this point. San Jose State University economist Jeffrey Rogers Hummel has laid out the facts on this in detail (see “Ben Bernanke versus Milton Friedman,” Independent Review, Spring 2011) and notes that both Rutgers University economics professor Michael Bordo and monetary blogger Scott Sumner have also made this point. Maybe it’s all the more impressive that Erdmann, who is not an economist, appears to have come to this conclusion on his own. Moreover, he notes, the Federal Reserve started paying interest on bank reserves, which, of course, caused banks to hold on to reserves that they otherwise would have lent. This started in October 2008, which has to be one of the worst-timed Fed decisions since the Great Depression. The result of the relatively tight monetary policy was a large increase in mortgage delinquencies.

Erdmann’s best chapter is his epilogue. In it, he shows just how dysfunctional housing policy has been in the Closed Access cities. He includes a two-and-a-half-page quote from an April 2016 article in the San Francisco Chronicle about the barriers state and local governments have erected to prevent new housing. That passage is heart-breaking and, in my case, anger-inducing.

The epilogue also includes a nice discussion of one of the few cases where the term “trickle-down” makes sense: housing. Erdmann argues that when new housing is supplied to the top end of the market and high-end tenants move into the new luxury units, the vacated housing is often occupied by people with lower income. I’ve often made that point with an analogy to cars: you don’t generally see lower-income people driving relatively new Cadillacs, but you do see them driving 10-year old Cadillacs. Erdmann supplies his own car analogy, writing, “We don’t insist that auto manufacturers only produce new cars that are worse than the existing used cars in order to be equitable.” Moreover, he notes, whatever policy is chosen leads to some form of trickle-down: “When new units don’t ‘trickle down’ to households with lower incomes, households with lower incomes have to ‘trickle down’ to Phoenix or Las Vegas.”

Erdmann, quite reasonably, sees the solution in allowing more construction, especially in Closed Access cities. His last line sums up his policy message: “Let it rip.”