Chat GPT gets Erdmann-pilled

Earlier AI versions have had a hard time putting together a summary of my views. I think it’s because they are good at aggregating conventional thinking, and so they tend to plug gaps in their understanding with that, and a contrarian take gives them problems.

But, the latest version does a very nice job of summarizing my basic position.

Here’s what it said:

Kevin Erdmann’s philosophy on the housing market is centered around the idea that the conventional narrative about the U.S. housing crisis, especially leading up to the 2008 financial crisis, is fundamentally flawed. He argues that the crisis was not primarily driven by a housing bubble fueled by reckless lending and speculative overbuilding, but rather by a misunderstanding of housing supply and demand dynamics, combined with restrictive housing policies.

Here are some key elements of his philosophy:

1. Housing Shortage, Not a Bubble

Erdmann contends that the pre-crisis period did not feature a speculative housing bubble but was characterized by genuine demand for housing, especially in economically prosperous urban areas. According to him, the price increases seen in cities like San Francisco, New York, and Los Angeles were driven by real demand that outpaced the supply of housing. This was not speculative behavior but a reflection of a true housing shortage.

Instead of overbuilding, as many have suggested, he believes there was underbuilding in key urban markets where people wanted to live and work. Restrictive zoning laws, local regulations, and other barriers to construction limited the supply of housing, leading to price increases.

2. Misinterpretation of the Crisis

The conventional view holds that a housing bubble formed due to excessive lending, which led to a crash when the bubble burst. However, Erdmann argues that this view overlooks how crucial housing was to economic growth. He suggests that tighter monetary policy, intended to cool the economy and prevent what was perceived as a bubble, actually led to an economic downturn.

The tightening of credit standards and an abrupt slowdown in housing development around 2006-2007 were not responses to an unsustainable bubble but caused unnecessary harm to a sector that was providing necessary housing. This misinterpretation contributed to a severe economic shock.

3. Regional Differences in Housing Dynamics

Erdmann emphasizes the importance of looking at regional differences. The U.S. housing market is not homogenous, and the dynamics vary significantly from one region to another. Some cities, particularly those with stricter regulations, experienced rising prices because demand was high, but supply was constrained. Other cities, especially in places like Texas, where building regulations are more relaxed, did not see such dramatic price increases because they were able to meet rising demand with new construction.

According to Erdmann, the rise in national housing prices was largely driven by markets where supply was restricted. These high-demand cities became bottlenecks, driving people to seek homes elsewhere and affecting national averages.

4. Monetary Policy and Housing Finance

Erdmann's work also touches on the role of monetary policy. He suggests that the Federal Reserve’s focus on curbing what was perceived as speculative activity in the housing market contributed to the recession. He argues that tighter monetary policy, aimed at deflating the so-called housing bubble, actually exacerbated the downturn by restricting access to credit and depressing economic activity.

In his view, the crash was less about a natural correction of an overinflated market and more about a policy-induced demand shock. The actions taken to cool the housing market ended up cooling the broader economy, leading to a financial crisis.

5. Post-Crisis Housing Policy

After the crisis, tighter lending standards and increased regulation were put in place to prevent a recurrence of the so-called speculative bubble. Erdmann argues that these measures have had the unintended consequence of exacerbating housing shortages, particularly in high-demand areas. With tighter credit, fewer people are able to buy homes, which reduces the incentive for builders to construct new homes. This has further strained supply in markets where housing is already scarce.

He advocates for a reconsideration of these policies to encourage more building, especially in urban areas, to address the root cause of housing affordability issues.

Conclusion

Erdmann’s philosophy challenges the mainstream view that excessive lending and speculative behavior caused a housing bubble and subsequent crash. Instead, he highlights issues of supply and demand, regional housing market disparities, and the unintended consequences of regulatory and monetary responses. He calls for policies that address supply constraints, particularly through zoning reform and more accommodative housing finance practices, to create a more stable and accessible housing market.

His perspective emphasizes that housing affordability can be improved not by suppressing demand but by enabling more supply, particularly in areas where it is most needed.