Steven Horwitz

I just had an interesting email exchange with an acquaintance in the commerical real estate industry. He put forward an argument that we actually do have something close to a natural experiment that gives us insight in to the counterfactual of "what would have happened to the residential real estate market if we had not intervened after the crash in 2008?" I reprint his whole argument below, but the gist is that commerical real estate has recovered precisely because we allowed the recalculation process to take place there by not intervening. Residential real estate has not recovered because we've prevented it. I find this to be pretty persuasive.

Here's his analysis:

Compare the bounce back in the commercial real estate market and the recent news in residential housing. Why are the commercial markets almost back to pre-great recession levels but residential housing is back to 2003 levels? Wasn’t the commercial real estate industry heavily leveraged and financed mercilessly by Wall Street? Yes and yes. So, what gives? Two major differences: there was never heavy governmental support or subsidies to the industry; no obvious voting base to make happy with commercial real estate owners (rich, few, local and diversified). And second, there was no bailout in ’09 for the industry; they recapitalized themselves. Markets cleared, prices bottomed, capital rushed in to grab the bargains (which are all gone now), and the recession has ended in this sector.

To me, this IS the “counter factual” that Keynesians say can’t be proved (“how do you know it wouldn’t have been much worse without our stimulus, bailouts, low interest rates” they cry). Well, in a very similar market that was exposed to the same “unregulated” Wall Street actors, the same rating agencies, the same capital flows internationally (“glut of savings”), the same negative real rates, and the same excesses (Stuytown, Archstone Smith, Hilton, to name just three deals that blew up Lehman and Bear Stearns), we have a much better result two years later but without the Keynesian interventions. A hands off policy seemed to work here pretty well.

Thoughts?