unfolds daily. in 1979, c-span was created as a public service by america's c e cable television companies. we bring you unfiltered coverage of congress, the white house, the supreme court and public policy events in washington, d.c. and around the country. c-span is brought to you by your cable or satellite provider. we step away from the shutdown discussion for the next 30 minutes. we talk about the role that housing supply played in the great recession, which was approaching its lowest point ten years ago this month. start by explaining just what a housing bubble is. >> a housing bubble is when prices rise to a level that seems like it can't be justified by fundamentals. a lot of times i think we use price to income levels, that

sort of thing. it seemed looking back to 2004 and 2005 that prices had risen above the fundamentals. it seemed like that must have been the outcome. so what i found looking back is in a lot of ways it wasn't as inevitable as it seemed. it's a lot more complicated than we originally thought it was. i think a lot of the things we thought were solutions to a bubble may have made problems worse. >> let's talk about the things we thought. how policy makers, economists explain the cause of that housing bubble that started in the mid 2000s and then we saw with the recession. >> i think credit markets -- the tricky thing is, any time -- we fund houses with credit. we fund houses with mortgages. that's how our housing market

works. any time home prices rise, you are going to tend to see mortgage levels rise along with it. in fact, it's not just an american issue. if we look at canada or australia today or the uk, there's countries that have this same problem of high housing costs. we tend to see credit markets rie rising along with it. this that's what's causing prices to rise. what i found is there is a fundamental cause of high -- of home prices, which is the rental value of homes. say income for corporations is the fundamental reason for prices rising or falling on the stock market. a lot of times i think we sort of underestimate the effect that that has on -- i think that's what happened during the bubble. in a lot of ways, rising rents was the problem because we

didn't have enough houses. because credit was rising at the same time, it led us to think it was too much credit and we had too much of everything. so our solutions were all about pulling back, getting rid of the excess when we didn't have enough houses. >> a day where the lead story in t"the wall street journal" is about housing prices in this country. a slump in housing market deepens, a decline of 6.4% in december. it could extend into 2019. the headline there on "the wall street journal" home page. if you want to join our discussion as we talk about housing supply andin this count and what it could mean for the future, 202-784-8000. 202-784-8001. you can start calling in as we show you the cover of his book that is out.

"shut out," how a housing shortage caused the great recession. talk about the housing shoe ini and where we were seeing it. >> we mainly see it in -- there's four or five major cities. you look at new york city and boston on the east and los angeles and san francisco on the west. those cities really have a very different housing market than the rest of the country. they build -- they allow new building at lower rates than any other major city. so what you see -- what we see today is that costs are high in those cities even today. it's because they don't have enough houses. there's this sort of -- there's this demand to get into those cities. they are economically succe successful. there's a basically bidding war of people that can fit in. that was happening at that time also.

those cities are sort of the core of the problem. they were the prime trigger that set off what became the bubble. >> when we talk about those impacts -- we will get to them. help me understand this housing shortage more. i want to show viewers this chart. it shows the monthly supply of houses in the united states going back to the 1960s. i want to focus on the mid 2000s, in the time just before the great recession, a year before the great recession, the ratio of houses for sale to houses sold was 7.2. that climbs to over 9 during the great recession, at the height ten years ago it was 12.2 houses for sale versus every house sold. how does that show a housing shortage? >> i think the main thing that that shows is that there was a

lot of demand for housing going up through the bubble. when that spikes during the crisis, during the bust, really what was happening was we sort of sucked credit and money out of the economy in an attempt to kill what we thought was a bubble. that spike in inventory is actually because people didn't have the means to buy the houses. they still needed houses as tenants, is the interesting thing. i think a better indicator in terms of these cities is housing starts. in new york city or boston or san francisco or l.a., what you find is housing starts in those cities are half of the national average or less typically. the problem is those are the cities with the highest income and strongest income growth. because their housing expansion is so much slower than the rest of the country, it creates this perverse migration pattern where americans are migrating to places where incomes are lower instead of what we would hope to

be the case where they could move to places with more opportunity. >> in your book, you refer to that migration as something akin to a refugee crisis. >> yeah. a housing refugee crisis. >> explain that. >> what happens in 2004 and '05 is this sort of -- this came to a head. really what was happening in those cities like l.a. and san francisco -- i call them the closed access cities. what was happening is that this migration pattern, this segregation basically of americans according to who can afford to bid their way in to get access to the lucrative labor markets in tech or finance, it came to a head. there was a flood of households out of those cities for lack of housing. basically, typically households with lower incomes that couldn't win that bidding war for access,

they were flooding out by the hundreds of thousands during those years. what happened is they were flooding into riverside, california, sacramento, las vegas, phoenix. on the east coast it's different. it's a little bit funny. florida tends to get most of that out migration from the northeast. florida is sort of a center point of that bubble. it's like a secondary bubble that happened. you have these expensive cities where people are moving away, because costs are high. then you have these what are really the bubble cities where people are flooding in. even though those cities tended to have more generous lending policies, they were so overwhelmed by this flood of households that were housing refugees in a way, that they couldn't keep up. even a city like phoenix actually ran into a problem of having not enough houses. even the base of that problem was that there weren't enough houses in l.a. and that's what led to the surge of migrants.

>> i want to talk more about the policies -- housing policies put in place after that and its impact. chat with callers on this idea that it was a housing shortage, not a glut, that was one of the main causes. ted is up first in washington, new jersey. good morning. >> caller: good morning. i'm a realtor over here for a long time. i would just like to say, i read your book. i want to make a couple comments. first of all, the reason why there is a shortage, i think, is because in many areas, they create these zoning laws where they don't allow housing of different sorts to be built. the other thing i want to ask you about was -- i was a realtor then. when the crash came, i notice the president and congress on both sides didn't do anything for real estate. they let the banks throw everybody out of their homes. then all they had to do was do a cram down on the interest and principle until the crash was subsiding. they didn't do that.

it ended up in new jersey, we were 50th in job creation, number one in foreclosure for a long time because the banks didn't even winterize these homes. they threw everybody out because congress let them do that. we ended up with houses on the market that couldn't be sold. they were part of the inventory. they weren't part of the inventory also. i'm wondering what your thoughts about if the congress had let people stay in their homes, rather than be thrown out and have to rent somewhere else to get more time to work out, what is your thoughts on that? >> thanks for the question. >> those are two great points. the first point is absolutely on point. zoning is a big part of this. zoning and a lot of other sort of tools can be used in the cities to obstruct new housing supply. it's not really even just an american problem. you see the same problem in australia or london or toronto or vancouver. it's something about this --

there's a new wave of urbanization that today's technology level and culture sort of demand. governance in today's cities and these country are having a problem of allowing -- of meeting that demand. on your second point, i think probably the surprising finding of my research is that what was happening then -- what really was the best thing that do coul have happened action early as 2006 and 2007 would have been to just -- just to let the mortgage markets continue to function. one of the things i found that is surprising is there wasn't a change in the characterers amon. all the new ownership was among households with higher income. there wasn't really a shift in the average fico score during the boom period. what happened is because we thought that those were the causes, those were where the

policy solutions were done. the federal reserve started pulling back on the money supply. we started tightening up credit markets. then as things deepened, at every point along that time line, we were pulling back. we were saying we won't make loans to working class borrowers anymore. you can see these extreme movements late after the crisis had happened where people would fico scores under 750 or 760, the number of mortgages they were getting at that point is a fraction of what they had been. that's what actually cratered a lot of these markets. in every city across the country, whether they had a bubble or not during those 2004 and 2005 period, the bottom end of the market crashes across the board. actually, what i would say is what we should have been doing is letting them continue to lend to those markets.

then those foreclosures would have never had to happen. the prices of those houses would have remained level and those households wouldn't have had this problem of having a house that was in negative equity and it would have avoided a lot of the upheaval we experience. >> shelton washington is next. good morning. >> good morning. >> go ahead. >> i have a question for your guest. he addressed the sales market. i'm in the rental market. i'm 60 years old. i have never owned a home. i'm self-employed. i never considered owning a home. predominantly because i owe the irs money going back to 2008 and the great recession where i had to use my tax money i would have sent to the government to survive for two years because i had no clients. i'm self-employed. i had tax debt that keeps catapulting. if i were to buy a home, as soon as i put my money into escrow,

they swoop in and take it. i can't buy a home. my question has to do with the rental market. i have been looking to move from where i have been living for seven years because of barking dogs. the rental market inventory is, from what i researched on the web, at a 30-year extreme percentage where you just can't find what you are looking for. the last point i would say here is that the biggest reason for me is that i work out of my home. i'm a programmer. i need high speed internet. i have yet to get in my car once, not once in the last three years of looking every day in washington state, not once to check out a property. if you want something private enough where you won't hear your neighbor's barking dog and high speed internet, it does not exist. the question is, comment on the lack of inventory for us renters. maybe why there are so many renters. >> that's a great question. it's a great point.

this is a product of us having solved all the wrong problems. a lot of regulatory limitations have been put on lending to those -- to the low tier markets that tend to be dominated by rentals or where rentals are a larger part of the market. a lot of the households that are in those markets could be homeowners. they could be households -- families that would get a mortgage and their activity in the market would induce home builders to build new houses. it would loosen everything up. we sort of created a housing market of have and have not. federal regulators basically decide whether you are qualified to be a homeowner or not. if you are not qualified to be a homeowner, you are stuck in this renters market. because we thought the problem was prices were too high and the solution was bringing down prices, if you think about what that means mathematically in a housing market, the return that a landlord makes on their

property is rent divided by the price that they paid. right? if you make the price go down, that makes the return for landlords go higher. right? what's happened is we created this compression, because we removed all the potential owners from the low tier markets. we compressed -- rents have risen. we forced those markets into a landlord market. landlords need higher yield to justify owning their homes compared to homeowners. we sort of have created this low end of the market that is still adjusting to the new normal where we have created a class of have nots that aren't allowed to create new housing supply, that aren't allowed to be owners. it's actually making costs rise for people that are stuck in the renting class. you can see this -- even in household size for instance. household sizes in the united

states have been declining for several decades. you can see at the point where the crisis hits and we created this country of have versus have not, household sizes have continued to slowly decline. for renters, household size has continued to increase. we forced them into a broken market. renters are retracing and have to regroup. rents are going up. it's a budget problem for them. the solution oddly -- the prudent solution, even though it's counterintuitive is loosen up credit, allow people to be borrowers and owners and that actually will create supply that brings down rent and makes new units available for people like you. >> the book, "shut out." >> i work at george mason

university. a think tank that does a lot of work on markets and how markets work and a lot of economists doing great work there in terms of trade and housing policy and monetary policy. >> how long have you been there? >> i just recently was added as a visiting fellow, in the last couple months. i have been working on these book projects for a couple years. now i'm working a little more full-time. >> now with us to answer questions from our viewers. phone lines split regionally. bridgette in kansas. >> caller: good morning. thank you for taking my call. i have a question. on the shut down, down it seems it's a bait and switch. i heard a bunch of people were get i getting -- landlords were going

to evict them because of them not being able to pay. it seems like as it goes through all the programs and stuff, more and more people will be in trouble. it seems like that would be a way for landlords to get their renters out so they can raise their rent and they could turn around and sell them higher because they can show that they are getting more money. it seep seems like it would br false value to the real estate. we got -- it seems like if we let the government be shut down long enough, we could ram up the prices on that real estate. >> that's bridgette. >> i think the best thing for a tenant to have is an alternative. the best thing you can -- that can solve that problem is to have a house next door that's empty, that you can choose to live in instead of the house where the landlord is jacking up

the rent. for a long time, that's been a problem in these closed access cities i mentioned because there's not housing supply, because their locof the local p obstructions. we have created obstructions that prevent people from just funding a new home, from building a new house for themselves that they can own. really, all of these policy initiatives we put in place since the housing bubble have made that problem worse. they have taken away those alternatives. the best thing we can do for tenants is to build more houses and give them options. >> is l.a. one of those closed access cities? >> yes. >> david is calling in from l.a. good morning. >> caller: good morning. i'm ourt here out here in the you can barely afford to rent, buy or eat. i heard the gentleman speaking

about migration from california to arizona and points all in between. being that california -- i'm a native californian. it's too expensive. right? i would submit to your guest that another equation needs to be brought in on this. that is immigration. if you have an immigration policy that allows for, let's say, a million people to come in and your housing stock is 400,000, what then is the equation there for the souls that will be impacted by that type of influx of people who need housing? >> i think you are getting at a really key issue. i think it's an issue that was unappreciated at the height of the bubble.

if you think about it in terms of international migration, texas has a lot of migration from the south. arizona has a lot of migration. a lot of those states have a lot of migration, and it didn't cause home prices to double or triple over that period of time. the reason is in texas, they have looser building policies. so they can build houses to accommodate whoever wants to move to texas. really, it's the supply issue in the end that makes those -- that turns these forces of opportunity and people aspiring to a better life, the limit on housing supply turns that great thing into a problem. you can see the migration patterns that happen during the bubble. if you think about it -- if you compare that to the immigration issue, the international immigration issue, if you think

about it, we have migration out of places like los angeles. it's really perverse if you think about it. it's like if we had a migration crisis of -- if mexico is trying to build a wall to stop americans from moving to mexico. that's sort of the equivalent of what we are seeing out of places like l.a. and new york city. to get that sort of movement really is sort of a perversion cause that calls for a solution -- a policy solution to stop that from happening. for things to be dire enough in america that it would force that migration pattern to reverse is something that needs to be addressed. the thing that needs to be addressed is that places like l.a. need to find a way to allow more housing to be constructed. >> coming back to the housing slump, dad ta ta released yeste. u.s. home sales cratering in december. the housing sector ended 2018 in

a weak state. sales of existing homes fell 3.1% from a year ago to 5.34 million units, the weakest total since 2015. home sales have slowed after years of strong price growth and moderate inventory, according to "the washington post." more properties are sitting on the market. how do you read that? >> i think this gets to one of the core issues, which is, it's really important to separate price and rent. really, supply and -- we tend to think of price, because most of us are homeowners. when we are thinking about our housing expenses, we're thinking about our mortgage payment, the cost of owning a home, the price of the home. really, the act of consuming shelter is about rent. it's about the rental value that that home provides over a period of time.

rent expenses, rent inflation has been sky high for the past several years. most of the core inflation that we have today is coming from high rent inflation. that's coming from this lack of supply. it's coming from the rental value of homes being driven up because there's no alternatives being built. what's interesting is right now you see these downshifts in prices because people have the -- the sentiment is changing or people don't have the funds to buy houses. they still have demand as tenants. they are driving up rent. i think it's important as we move forward to think about those two separate things and to really concentrate on rent as the measure of housing supply and demand. when you see these things moving in opposite directions, it's probably a sign that funding and money and credit are drying up and preventing people from being buyers. it doesn't necessarily say a lot about housing supply itself. >> plenty of calls.

bob has been waiting. go ahead. >> caller: yes. the housing market is purely a supply and demand proposition. most economists believe that mortgage-backed securities or banks gambling caused the great recession. everything else is dancing around the edges on that. can you respond to that? one of the sort of pieces of information that havei have in book that gets to the heart of that question is one of the things that -- one of the pieces of information that's been shared that was seen as a piece of evidence that housing markets -- the buyer's market, the price had been unmoored from reality. the national level, it looked as though rents were going along at a normal pace and prices rose above their norms. it looked like price wasn't related to rent.

naturally, that would cause us to think, credit markets are causing this sort of irrational bump in prices. naturally, that will sort of contract back to norms. what i found is if you think about these different markets, these different cities, and cities where we can't build enough houses, so rents and prices are high and cities in other parts of the country where rents and prices were -- tended to remain moderate throughout the bubble, what you see is city by city, rent does explain everything. the reason prices were high in l.a. and san francisco was because rents are high. you can see that today in places like san francisco. people are mad there, not because poor people are being given loans that they can't afford. they're mad because people with a lot of income are moving in and making rents go up. one of the things i found that overturns that conventional wisdom is when you actually disaggregate by city, rent does

explain everything. >> jennifer, good morning. >> caller: good morning. >> go ahead. >> caller: okay. i have the tv on. >> turn your tv down and ask your question. >> caller: okay. i live in colorado. my house is a real estate agent. i guess my question this morning is, i don't feel like it's being addressed enough that in 1998 -- i believe i'm saying this right -- clinton and a republican congress deregulated by getting rid of -- i could be wrong on this. it allowed companies like -- big companies like aig and other companies to get involved in buying these chopped up and boxed up mortgages. then there was -- i have $10 million of mortgages.

now i need insurance on that. you get the credit defaults and all of those things. when you look at people -- older generations, they bought a house in the '50s and stayed there 40 years. their home went up in vallue bu very slowly. my question is, i feel like that is an enormous reason why we had what we had. >> thanks for the question. about a minute left. >> i think that's sort of one of the mysteries of what happened. there were some deregulatory issues. there were some ways that lending markets were sort of loosened up a little bit. the surprising thing that comes from the data from looking back and seeing what happened is that that deregulation, it seems as though mostly what it did was created ways for households that

lived in these cities that have dysfunctional housing markets, where rent is outside the historic norm -- if you live in l.a. or san francisco, your housing expenses are going to be stressful, whether you are a renter or an owner. a lot of what that deregulation was doing was making ownership available for those households that were already in a stressful housing market, whether they were tenants or owners. that was sort of the trigger of the migration event, that it was actually, believe it or not, loans to households that actually were able to make the payments in those markets. that triggered this migration away of people that were stressed and had to move to less expensive cities. you just don't see anything -- you don't see any sort of shift toward owners with lower income. you don't see those shifts that we would have thought looser credit markets would have created. mostly, they were allowing high priced homes for people with high incomes to sort of rise to the natural level that those

home values had. they were accelerating this unfortunate segregation by income that we have created by having these exclusive cities. >> appreciate your time this morning. the government shutdown over border wall funding is in its 33rd day. the senate has agreed to take up two votes thursday. that would end the closure. the houseworked on sever worked bills. later, bob shaffer moderates a forum on the consequences of the u.s. military withdrawal from syria and afghanistan. live coverage at 4:30 p.m. eastern on c-span2.