Joseph Stiglitz on Housing in Nevada

There is a lot of well-deserved YIMBY dunking going on about comments Joseph Stiglitz made as apologia for American urban zoning.

I want to hone in on another comment he made, because the comment is a perfect example of the complete lack of empirical curiosity that infects economics about the 2000s boom and bust, which I touched on in the previous post.

In a recent interview, Tyler Cowen asked Stiglitz about the 2000s housing boom. Here is the exchange:

COWEN: Now, your best-cited piece is your 1981 article with Andy Weiss on credit rationing, which is a macroeconomic idea. But do you think that since then, the real problem has more often been that we’ve thrown too much credit at things? So, the housing bubble, the student loan crisis — wouldn’t we have been better off with a lot more credit rationing?

STIGLITZ: The issue here was that we weren’t very good at credit allocation and that we thought, let the market rip. We lowered interest rates. We deregulated, so we didn’t look at where the credit was going. The bank supervisors the Federal Reserve is supposed to oversee — and there are actually several other supervisors that are supposed to oversee the riskiness of the lending — that’s where the fault came.

Now, one of the things that, when I was at the World Bank and since then, I’ve emphasized very heavily: One of the signs that there’s a problem in the credit allocation is when you see a very rapid increase in the credit in one particular area. It’s a sign that, probably, people aren’t paying enough attention. Particularly, when we saw the increase in credit to housing, we should have been worried.

As it turned out, the banks weren’t doing the kind of diligence that they should have done. They were passing these mortgages on to investors, effectively lying, committing fraud. There have been a lot of cases of this, where they said, “Well, we’ve been very careful. We’ve inspected. These are mortgages originating in owner-occupied homes, people with this income.” They hadn’t done any of that, and all of that contributed to the financial crisis of 2008. So, the issue isn’t the amount of credit. It was the allocation of credit. If they had used that credit for productive uses, how much better our economy would have been.

COWEN: Well, we built a lot of homes, right? It’s turned out we’ve needed them. The home prices that looked crazy in 2006 now seem somewhat reasonable.

STIGLITZ: A lot of them were built in the wrong place and were shoddy. I used to joke that there were a huge number of homes built in the Nevada desert, and the only good thing about them is they were built so shoddily that they won’t last that long.

This is a shocking thing to say, from the person it should be most shocking to hear it from. Or, it should be. Instead, of course, it's conventional wisdom. Before I break that down, let’s review the data.

The Hallucination

In Figure 1, I have focused on recent trends where we have housing data, but be clear, the population growth rate in Nevada in the 1990s and 2000s had been the norm since World War II. None of this was new.

In Figure 1, I compare Nevada population growth, an estimate of the growth of the housing stock based on new housing permits, and the vacancy rate (a blend of homes for rent and for sale).

Both population growth and housing permits in Nevada were on a gentle downward trend from the mid-1990s. There was no building boom in Nevada. Stiglitz isn’t overstating something here. He’s repeating a communal hallucination 20 years after it didn’t happen.

By 2006, housing permits transitioned into a full-blown collapse. Population growth started to follow in 2007. And, vacancies increased as population collapsed.

Figure 1

This is the clear picture of a demand bust. No supply boom. Just a demand bust. And, not only did a supply glut in Nevada not happen empirically, it could not happen hypothetically.

In 2007, at Jackson Hole, John Taylor told Federal Reserve members that they had triggered something like a million too many homes.

At the same symposium, Ed Leamer said, “The inevitable effect of the low rates has been an acceleration of the home building clock, transferring building backward in time from 2006-2008 to 2003-2005. Our Fed thus implicitly made the decision: more in 2003-2005 at the cost of less in 2006-2008. That strikes me as a very risky choice. The historical record strongly suggests that in 2004 and 2005 we poured the foundation for a recession in 2007 or 2008 led by the collapse in housing we are currently experiencing.”

All the places where vacancies spiked after 2007 were high growth places. Think about this. From the macroeconomic point of view, which places would end up with vacancies?

Let’s say that those homes were constructed evenly across the US. (In fact, during the moderate boom in building before 2006, the rise in per capita debt was relatively evenly distributed across the US.) If that is the case, then a fast growing region like Nevada would have been the first region to soak up all the excess supply. The US housing stock was growing by about 1.6% annually at the time. If a city is growing by 4% annually, that’s a few months of home sales.

Alternatively, if millions of homes had been “transferred back in time” in Leamer’s parlance, and they were the root cause of a spike in vacancies in a few locations, just imagine what housing growth in Figure 1 would have to look like.

Not only is Stiglitz claim non-empirical, it is extraordinary. The amount of building that would put supply in the center of a story about vacancies spiking from 5% to 8% in 2 years in a fast growing region likely defies the physical limitations of regional construction inputs.

Stiglitz suggests that the housing glut in Nevada is something he has commonly cited and remarked upon. In nearly 20 years, he must never, not once, have thought to look at the data. And, he must have read dozens of books or papers about the crisis. Likely, not a single one of them did either.

Furthermore, Stiglitz fingers reckless credit markets as the cause of the hallucinated supply glut. He says, “It was the allocation of credit. If they had used that credit for productive uses, how much better our economy would have been.”

As Figure 2 from “Building from the Ground Up” highlights, the relative rise in debt in Nevada mostly accumulated when construction was collapsing, and it lagged the price bubble in Nevada.

Figure 2

And, finally, Figure 3 shows the percentage of mortgages 90+ days late in the US and in Nevada, quarterly, from 2003 to 2010. Late payments in Nevada didn’t rise to unusual levels or surpass the US average until the first quarter of 2008.

Figure 3

Look back at Figure 1 to orient where the rise in late payments falls in relation to changing supply and demand dynamics in Nevada. The 1st quarter of 2008 is 4 months after Taylor and Leamer had chastised the Fed for fueling a supply glut. In 2006, population growth of 3.7% in Nevada was relatively tepid. By 2008, it was down to 2%, and falling fast.

As I frequently note, any way you slice it, from the end of 2007 to 2009, the average credit scores on approved mortgages spiked from about 710-720 to above 760. The score on approved mortgages had not deviated much before 2008, and after it spiked to above 760, it remained there.

Looking back at the figures, there was never a Nevada building boom. The Nevada price bubble had reverted nearly back to the pre-boom norm by 2008. The subsequent spike in Nevada delinquencies happened after the population bust and coincided with the mortgage crackdown.

The crisis in Nevada was created by a regional population bust followed by a national credit bust. The housing depression that followed has been enforced by very tight credit regulations.

The Self Denial

In Cowen’s interview, the stepping stone to Stiglitz’s supply claim was Cowen’s mention of a 1981 paper Stiglitz co-authored. The point of that paper was that credit markets undersupply credit. Surely this paper is a key guidepost to explain how damaging the post-2008 mortgage crackdown has been.

The mortgage crackdown is likely responsible for regressive rent inflation, averaging something more than 20% since the crisis, but closer to 50% in the poorest neighborhoods in cities where the mortgage crackdown hit hardest. The antidote to our housing depression, our homelessness epidemic, and regressive rent inflation that has turned working class income growth after rent negative is the most cited paper of a living economics Nobel laureate. Given the chance to make this devastatingly important point, Stiglitz hallucinates a housing glut in order to deflect!

Stiglitz was a supporter of Fannie Mae and Freddie Mac before the crisis and he took some heat for it.

Fannie and Freddie:

1. Weren’t an important factor in the 2000s credit boom.

2. Never really required a penny of taxpayer money.

3. Were responsible for the crisis because they clamped down on mortgage access under conservatorship, not because they helped expand it before then.

Back in 2011, PBS addressed Stiglitz’ association with Fannie and Freddie. They interviewed Gretchen Morgenson and Josh Rosner, co-authors of the book “Reckless Endangerment”. Rosner said this of Stiglitz:

Fannie was shrewd enough to understand that in order to push their agenda on Capitol Hill they needed to be supported by economists as well and so they started a series of papers where they would hire notable Conservative economists like Glenn Hubbard or progressive economists like Joe Stiglitz and Peter Orszag to justify various aspects of Fannie and Freddie’s mission, or dispel concerns about their safety and soundness, and really used those as lobbying points on Capitol Hill.

First, can we take a moment here? I hope that with the distance of time, the excesses of the moral panic that caused the crisis are easier to see.

Why talk like this?

Fannie and Freddie couldn’t, ya know, just seek the input of an economics Nobel laureate whose most cited paper was about the optimal rationing of credit, in order to, um, maybe meet their mission in the best way possible? No. It was a power move. Shrewd and political. Pushing their agenda. According to Rosner.

This is a critic whom Fannie and Freddie had no chance of pleasing. Let’s face it. But in the moral panic, boy did this stuff get everyone’s pitchforks sharpened.

Stiglitz replies with a reasonable defense of himself. It includes several thoughtful criticisms of the pre-2008 Fannie & Freddie set up. He blames them too much for the crisis, and he joins in the criticisms of “too big to fail”, as if stabilizing what was left of the MBS market had any downside at all. Killing one-third of the mortgage market permanently cut half the value off of low tier homes in many cities and was responsible, more or less, for the entire $5 trillion on lost wealth. Imagine if we hadn’t backstopped it (at great profit to the federal government, by the way).

Anyway, that response was probably the best he could do under the circumstances, and we can’t insist, in hindsight, that every public figure was individually responsible for overturning the Zeitgeist every time they are confronted by a news interview.

My broader point here is that this all runs so deep that, here we are in 2024. His 1981 paper addresses our moment. And it has been rendered toothless.

And, the thing is, there are many stories one could tell. One could say that credit is generally undersupplied, but there were various specific problems with the way credit markets were managed in the 2000s that got out of hand.

You could even follow the implications of my figures above and say that credit wasn’t particularly important in the price runup in the 2000s, but that sloppy and unstable credit to desperate borrowers, and financial products issued to risk-averse savers when markets like Nevada were imploding, made a crisis worse, whether the crisis was fated to happen or was due to policy choices.

Cowen has pitched a softball question here. It would be self-serving and also, importantly, correct for Stiglitz to trumpet that work and claim that, now more than ever, we need his work to optimize credit access during expansions and keep it stable during market downturns.

But, instead, he turns to the supply glut story.

Frequently, when people are exposed to my work, they will reply that the important part of the 2008 crisis was the credit instruments that drove prices to unsustainable highs that had to crash and that then crashed the finance sector and the broader economy with them. Housing supply wasn’t that big of a motivator, they say. It was more about volatile prices.

And, here, in 2024, maybe the most honored economist on the topic of information asymmetries in credit markets sticks a hallucination of a housing supply glut between himself and a productive point of view.

Maybe Stiglitz deserves a place next to Ed Leamer, who at that 2007 Fed symposium pointed out that housing starts are a near perfect leading indicator for recessions, that they had declined in a way that was pointing to a coming recession, and that the Fed should ignore his own salient analysis because he also joined the hallucination of a supply glut.

The supply glut is a very important part of the conventional mythology. It has always been lurking under every claim, and it shows up explicitly at notable moments.