Zywicki in Forbes: Housing Crisis Isn't a Crisis

Professor Todd Zywicki's take on the causes and meaning of today's "housing crisis" are explored in a Forbes article in which he discusses what he views as former Federal Reserve Chairman Alan Greenspan's role in artificially driving down the prices of ARMs through drops in short-term interest rates, enabling many Americans to purchase homes with mortages that were larger than they could really afford and bringing speculators into the market.

Zywicki also discusses his disagreement with the Obama administration's view that the housing crisis is "unraveling" homeownership for the middle class. His research supports the idea that there are three distinct types of housing markets in the U.S. today and that only one of the three shows signs of real distress. Were the administration to take steps to reassure Americans there is a specific, limited nature to foreclosures, they would be better served than by pursuing harsh rhetoric, he believes.

Taking it a step further, Zywicki says the administration should avoid intervening in the housing market. "Assistance for the relatively small number of people who are facing really tragic circumstances makes sense," he says, "but if the administration tries to push overall housing prices back up, it will only be asking for trouble. We overbuilt. That's the reality. And not even Obama can change it."

The Housing Crisis Isn't a Crisis, Forbes, April 10, 2009. By Peter Robinson.

"His research has revealed three distinct types of housing markets--and only one of the three shows real signs of distress. Even then, that distress is only in a limited number of areas.

"The first type of market behaves the way markets are supposed to behave, with smooth adjustments between supply and demand. When prices rose in places such as Dallas and Charlotte, builders constructed new houses. When prices softened, builders stopped. 'Prices in these markets rose gradually,' Zywicki says, 'and now they're settling back to earth. There hasn't been any tragedy.'

"The second type of market, which appears in New York, Boston, San Francisco and Washington, D.C., demonstrates a long history of price volatility. 'The housing stock in these markets is constrained,' Zywicki says, 'either by geography--San Francisco is surrounded on three sides by water, for example--or land use controls.' When demand in such a market increases, prices soar. And when demand weakens, prices plummet.

"'But the people who live in these markets expect big price swings,' Zywicki says. 'They've learned to live with them. They're holding onto their homes because they're confident prices will eventually recover. Again, there hasn't been any tragedy.'

"The third type of market displays both the ability to expand the supply of houses that characterizes the first type of market and the price swings that characterize the second type. 'Type three markets,' Zywicki says, 'are concentrated in the Sun Belt. Ordinary investors seem to have calculated that a lot of people would either retire or buy second homes in these places. And when prices went up, speculators moved in. Pure bubbles developed.'

"In type three markets, hundreds of thousands of new homes went up. This oversupply will now keep prices low for years. 'Las Vegas, Phoenix, Tampa--those are the places you'll find the tragedies,' Zywicki says."

Read the article