Erdmann Housing Tracker · Housing & Cities
TIER 5 Mon, 20 Apr 2026 14:04:19 +0000
Matt Darling recently alerted me to something that had somehow escaped my attention. ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ | | ---|---|--- | | | Forwarded this email? Subscribe here for more --- --- # Another Nevada Hallucination | | Kevin Erdmann --- | Apr 20 --- | --- --- | | | --- | | --- | | --- | | --- | | READ IN APP --- Matt Darling recently alerted me to something that had somehow escaped my attention. Upgrade to paid In November 2008, in a keynote address at the University of Chicago, economist John Cochrane apparently said, "We should have a recession. People who spend their lives pounding nails in Nevada need something else to do…" I have previously posted about Joseph Stiglitz making a similar claim. Among other things, Stiglitz said, "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." Horseshoe theory in economics, I guess? In Stiglitz's case, he said this fairly recently. In Cochrane's case, I can't seem to find a working link to the speech. Could this mean that he is appropriately embarrassed by what he said? The evidence survives from some post-recession discussion from Paul Krugman and Brad Delong. Here, by the way, is a chart of vacancies, population growth, and housing production in Nevada. There was no building boom in Nevada before 2008, and by the time Cochrane spoke, Nevada was suffering an unprecedented collapse in demand, population growth, and housing construction. What Nevada _desperately_ needed at the time of his speech was even a partial return to decades-old growth patterns, from which it hadn't diverged before the collapse. It needed _growth_ in order to get back to _normal_. | | ---|---|--- Figure 1 While Cochrane and Stiglitz suffered from the thing they knew that just ain't so, Krugman and Delong, and the other discussants at the Delong link, suffered from what they don't know. While Krugman & Delong make reasonable and interesting comments about the 2008 crisis, and rightfully take Cochrane and the liquidationists to task, they seem to have no awareness whatsoever of the sudden end of 1/3 of the traditional mortgage market in 2008. They are all discussing various theories about what caused the crisis, or what made the recession as deep as it ended up being. And, they have this mystery in front of them that housing construction had been declining sharply and deeply since the end of 2005, with little effect on the rest of the economy. Then, in 2008, everything accelerated, which they all refer to, loosely, as a panic or a financial crisis. And, they just _don 't know_, to the last person, that right when the bottom mysteriously dropped out of the economy, millions of families were abandoned by the mortgage agencies. Figure 2 compares the average credit score on new mortgages, tracked by the New York Federal Reserve to employment growth (detrended to highlight the parallel patterns). | | ---|---|--- Figure 2 And, as I frequently document at this newsletter, from that point on, the wealth shock was _selectively felt by the neighborhoods who were suddenly abandoned._Figure 3 compares the price trends of homes in Atlanta, in neighborhoods with high and low average incomes. | | ---|---|--- Figure 3 Now, if Figure 2 was the extent of the evidence on this, then, you could accuse me of making a big deal about a fitted chart. But, the evidence screams from home price data, in every city. Whether they had a building boom or not, whether home prices had been elevated or not, they saw a deep drop in low-tier home prices that coincided with the shift in agency standards - and it was a massive shift. Trillions in lost home equity, systematically correlated with neighborhood incomes and credit dependency. But, frankly, it doesn't matter how convinced anyone is in my certainty of the importance of this factor. Wherever you stand on that, the more substantive error would have been to _not know about it at all_. It should have been one of the primary focuses of the discussion, and it was AWOL. It's still AWOL. At the very least, it merits more research and attention, and should have then, too. What I'm saying is that, even if you think I may be wrong in saying the credit crackdown was, broadly speaking, the _cause_ of the 2008 financial crisis, you need to grapple with the error that everyone shared - Cochrane, Krugman, Delong, the Federal Reserve, the FHFA, the Financial Crisis Inquiry Commission, everyone - that removing mortgage access for more than 1/3 of the previous long-standing market was a non-issue, not to be noticed. Their potential error is leagues worse than any risk I have of overstating the case. Accusing me of overstating the case does not relieve anyone from the obligation of observing the error in the other direction. And, when you allow yourself to make this self-evident correction, to acknowledge that universal error, as you reanalyze the period with knowledge of it, its importance grows on you. So, as embarrassed as John Cochrane should be about calling for a recession _**in November 2008**_ because he hallucinated a Nevada building boom and apparently couldn't be bothered to look at a chart before giving his speech (not to say that anyone else did), how could the recession have gone any better, even if a recession hadn't been so popular? If nobody had any idea what was specifically causing a real estate wealth shock and a credit shock how was anyone going to turn the economy around? How could there have been anything but a financial panic if, while the panic was happening, a major obvious aggravator was invisible in spite of being there in plain sight? You can be as skeptical as you want to be about my assertions, but I don't think there is a defensible reason to be less critical of all the alternative theories of the panic that worked through a process of elimination for the panic's causes without considering the immediate, targeted, and permanent loss of $1 trillion in annual mortgage funding, relative to long-standing norms. I have marked Figure 4 with a vertical line to show just how late in the collapse Cochrane's comment was. Figure 4 shows new home permits per capita (using labor force in the ratio to get a stable measure with quarterly numbers) in Nevada and construction employment's share of total Nevada employment. Even if Cochrane had some genius insight about why the fastest growing state for most of the previous 70 years needed to suddenly stop, at the point he made that speech, even if that could have remotely been correct, what Nevada needed to make the transition to non-growth was stimulus and support. Even if he had a reason rather than a hallucination to make that statement, the policy response in _November 2008_ would have been to _avoid_ a recession that the sudden end of growth would have risked creating. The policy response would have been to stimulate the economy and to avoid a recession so that those workers _could_ find something else to do. | | ---|---|--- Figure 4 Upgrade to paid As Krugman wrote, "Personally, I think this is crazy. Why should it take mass unemployment across the whole nation to get carpenters to move out of Nevada?" And it is crazy, not just in the sense of tossing out a "that's crazy", but actually, literally crazy. How does one get from point A to point B there? How does a person start with the proposition that former construction workers in Nevada need to do something else and see a recession as the pathway to finding something else? But, also you can see the broader problem in Krugman's comment. I'm not sure he ever went out on a limb about it. But, the blindness is two-fold here. First, the lack of recognition that removing $1 trillion, annually, of previously normal mortgage funding from the economy might be a useful part of the discussion, but also, tacitly seeming to agree that there was no future for construction workers in Nevada, and that moving them out was what we should be benchmarking the economy to. He complains that Cochrane's errors come from assuming rational and efficient markets, but the assumption that Nevada had too many homes because of irrational speculators and builders is just as divorced from reality. It's like agreeing to blow up the dam, and then having a debate about how to avoid floods. Krugman takes the common position that the crisis (which was really caused by the mortgage retraction he wouldn't bother to observe) proves that he was right about there being a housing bubble 3 years before. Confirmation bias via omission. It is true that construction employment in Nevada grew a bit more than housing permits did, and was a bit higher by 2005 than it had been in the 1990s even though new permits per capita were not. That follows a similar pattern to Australia and Canada at the time. Regardless, whether you're looking at construction employment or new home permits in Nevada in November 2005, let alone in November 2008, there was no unprecedented spike in activity calling for a purposeful economic breakdown. Also, as I think I have mentioned before, Nevada had been growing at more than 4% annually for decades when the crisis hit. It is impossible for a city growing that quickly to end up with a glut of new homes that would take more than a few months to work through. The _only way_ to end up with a glut of homes in a market growing that fast is to engineer a recession so deep and so damnable that population growth immediately and permanently goes from 4% to nil. The recession Cochrane wanted even though it had already happened, and that Krugman thought proved he had been right, was the only way Nevada could have ended up with a lot of vacant homes or new homes for sale by the time they were having their debate. With 4% annual growth, speculative and optimistic builders simply couldn't create enough supply to put Nevada in the condition it was already in when Cochrane made the speech. In fact, when he made the speech, it had been in the condition only an engineered recession could have created for quite some time. Figure 5 shows the federal funds rate and employment growth in Nevada, over time. Note, in previous recessions, Nevada employment growth had been a lagging indicator. It would drop from it's normal expansionary growth rates of 5%+, and by the time it would hit zero, the recession would be officially over and the Fed would be near the end of its rate cutting cycle. | | ---|---|--- Figure 5 When employment growth hit zero in Nevada in September 2007, the Fed hadn't even _**started**_ its rate cuts. In September 2007, Nevada was at what should have been the _**end**_ of a contraction. Does John Cochrane know today that his call for recession in Nevada happened after the contraction he wanted had already happened, and _then some_? If he gave a speech today to the University of Chicago economics department, would a single person who has the credentials to be in the room with him have even the slightest idea that when he was calling for a recession, Nevada was already a full year into a financial avalanche of the most consequential retraction of reasonable credit access in modern history? Perhaps, people who spend their lives calling for recessions at University of Chicago conferences need something else to do. In 2010, Cochrane wrote a paper warning that the fiscal response to the recession could lead to high inflation. Ironically, the only reason inflation was anywhere close to the Fed's 2% target in the following decade was because rent inflation averaged nearly 3%. Why? Well, in a nutshell, people who had planned on spending their lives pounding nails in Nevada (and Florida, and Arizona, and Ohio, etc.) were _forced_ to find something else to do. They were forced to find something else to do because neither Krugman nor Cochrane nor any economist between them could be bothered to wonder whether it made any sense for Nevada suddenly to go from decades of 4%+ growth to only 1% and what might have caused such a fast and permanent shift. I'm not sure how many of them even know that that has happened. You're currently a free subscriber to Erdmann Housing Tracker. For the full experience, upgrade your subscription. Upgrade to paid --- | | | Like --- | | Comment --- | | Restack --- (C) 2026 Kevin Erdmann 548 Market Street PMB 72296, San Francisco, CA 94104 Unsubscribe