America’s housing shortage

Brad DeLong might be right.  At the recent AEA meetings he said something to the effect that America has a housing shortage, as many families are doubling up. I thought it was a clever, counter-intuitive way of thinking about the aggregate demand shortfall.

This got me wondering about the commentators who insist that easy money caused America to build a vastly excessive number of housing units, and that’s why there are record housing vacancies today.  It seems to me that when you look at the data, housing construction has not been excessive in the period beginning in 2002, when the Fed allegedly cut rates too low.  See what you think, and as you do so keep in mind that America had 220 million people in 1978, and 300 million by 2008.  So construction in per capita terms has actually had a slight downward trend since 1978 (the earliest figures I could find.)

Year Single-Family Multifamily Total
2010 470,900 116,700 587,600
2009 445,100 108,900 554,000
2008 622,000 283,500 905,500
2007 1,046,000 309,000 1,355,000
2006 1,465,400 335,500 1,800,900
2005 1,715,800 352,500 2,068,300
2004 1,610,500 345,300 1,955,800
2003 1,499,000 348,700 1,847,700
2002 1,358,600 346,400 1,704,900
2001 1,273,300 329,400 1,602,700
2000 1,230,900 337,800 1,568,700
1999 1,302,400 338,500 1,640,900
1998 1,271,400 345,500 1,616,900
1997 1,133,700 340,300 1,474,000
1996 1,160,900 315,900 1,476,800
1995 1,076,200 277,900 1,354,100
1994 1,198,400 258,600 1,457,000
1993 1,125,700 162,000 1,287,600
1992 1,029,900 169,900 1,199,700
1991 840,400 173,500 1,013,900
1990 894,800 298,000 1,192,700
1989 1,003,300 372,900 1,376,100
1988 1,081,300 406,700 1,488,100
1987 1,146,400 473,800 1,620,500
1986 1,179,400 626,000 1,805,400
1985 1,072,400 669,500 1,741,800
1984 1,084,200 665,300 1,749,500
1983 1,067,600 635,500 1,703,000
1982 662,600 399,700 1,062,200
1981 705,400 378,900 1,084,200
1980 852,200 440,000 1,292,200
1979 1,194,100 551,100 1,745,100
1978 1,433,300 587,100 2,020,300

Source: U.S. Census Bureau

Here’s my assumption.  Housing construction normally seems to fluctuate between one and two million units. Let’s take 1.5 million as roughly the trend rate which keeps up with population.  Yes, it’s true that we exceeded that number every single year from 2002 to 2006, and the total excess production was about 1.87 million units.  That’s a lot.  But over the next four years there was a shortfall of about 2.6 million units.  So why do we seem to have a hugely excessive number of homes, if we are actually 730,000 short?

One answer is a decline in immigration.  A year ago I suggested that the decline in immigration might have played a role in the housing crash.  I think it’s fair to say my theory wasn’t met with widespread acclaim.  So if that’s why I’m wrong today, if less immigration explains our housing surplus, I’ll take it.  At least I would have been right last year, on a point all the pundits missed.

But I doubt that’s big enough to make a major difference.  Even last year I merely suggested it was a contributing factor in the Southwest.  A more likely explanation is that the sharp fall in NGDP led to mass unemployment, especially among the young.  This caused them to start living with their parents, even when in their 20s (something I couldn’t even imagine doing when I was young.)  In that case the problem isn’t that too many houses were built (well actually a few too many were, but they should have been quickly absorbed in a country with 120 million units) but rather too little demand, because people have too little money.  And who determines how much money there is in the economy?

There’s a way to test my theory.  If the other side is right, and we have all these vacant homes because we built way too many in the middle of the decade, then the number of vacant home should have dropped rapidly during the last three years, and especially during the last two years.  The year 2008 was the first year below a million since my records began in 1978 (and probably much earlier.)  That’s clearly below any reasonable estimate of normal absorption.  Then in 2009 and 2010 we were down close to a half million units, a mind-boggling low rate of construction.  Vacancies should be plunging under any reasonable estimate of market absorption.  But guess what, over the past three years there has been no decline in housing vacancies (assuming I am reading the 5 year version of this graph correctly); vacancies have leveled off since March 2008 at just under 19 million units, up from 16 million in early 2006.

Given ultra-low construction, and US population growth of about 3 million/year, there is only one explanation for that pattern.  Astoundingly low demand for housing.  Do young people actually enjoy living with their parents, or might America be experiencing an aggregate demand shortfall?

Another reason we need more NGDP.

This was spurred by a Chicago alumni magazine article that made the following claim:

Economic recovery will be slow, [Erik] Hurst says, because the massive misallocation of resources that the housing boom created cannot be quickly remedied. During the ten years after 1997, he said, 40 percent more housing was constructed in the United States than in any decade on record. Today 2.3 percent of single-family homes are vacant, an increase of more than 64 percent since 2005.

The housing oversupply, in turn, has contributed significantly to high unemployment. As the construction industry boomed, much of the American workforce shifted to housing-related industries, on both the construction and banking sides. Now, of 3 million open jobs in the United States, only 65,000 are in housing-related fields, Hurst said. Thus, many unemployed workers are qualified for jobs that are no longer available””jobs, he predicts, that won’t come back.

This is completely inaccurate.  As you can see from the table, housing construction in 1998-2007 was only 8.4% above the levels of 1978-87.  And it was much lower in per capita terms.  The 2.3 million single family homes that are vacant are probably little changed from a few years ago, whereas the number should be plunging with low construction.  There is no reason construction jobs shouldn’t come back, unless we shoot ourselves in the foot.  As I showed, housing construction in the past decade has been below normal.  If all you knew was the housing construction data from the noughties, you’d expect another 1.5 million homes a year to be built in the teens, just like other decades.  I’m not saying that will happen.  Indeed I think it won’t happen.  But if it doesn’t there will only be two possible explanations; a crackdown on immigration or a prolonged NGDP deficiency (perhaps combined with supply-side problems with the labor market.)  It won’t be because we built too many houses in the 2000s.  We didn’t.

PS.  Please do not tell me about local housing markets.  I am claiming America has too few homes; I completely agree that Detroit and Vegas have too many.


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37 Responses to “America’s housing shortage”

  1. Gravatar of Nick Rowe Nick Rowe
    20. January 2011 at 20:17

    There is unemployed labour, and unemployed housing. Both are parallel symptoms of the same deficiency of aggregate demand.

    “Potential” output should include the services of housing. The loss of income from unemployed labour and unemployed housing creates a feedback loop into an induced decline in demand for labour services and housing services.

    Suppose some houses fell from the sky, like manna from heaven. Would we still say we had “too many” houses? In optimal control theory, how we got to the current state from the past shouldn’t affect our optimal plan going forwards.

    You have really been on a roll recently Scott. I haven’t been commenting. No need to. I just read and say “Yep”.

  2. Gravatar of brian brian
    20. January 2011 at 20:41

    I think the problem is that house prices are still too high compared with the wages that the marginal buyer earns. Since unemployment has risen by roughly 90% since 2007 that means there are households which don’t have sufficient income to buy new housing stock at a price that builders can afford to make them. Therefore, until household income rises, there will be not enough demand to return housing supply to normal levels.

  3. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. January 2011 at 21:06

    Nothing like data to destroy a good myth.

    But I can see that the overhang crowd are going to point out the long run downward trend in housing construction per capita.

    I took the liberty of pasting your data into an excel file. I then downloaded the annual population data and estimated a trend equation. (All of this took about 10 minutes.) The results suggest that the trend consruction rate has fallen from about 7100 per million to 4300 per million over the timeframe.

    Construction is above the estimated linear trend from 1998 through 2006. Totalling the residual over that time gives an surplus of about 2.8 million. But from 2007-2010 there was a shortfall of about 2 million. Thus even by this exceedingly generous measure there is an overhang of at most 800,000.

    But we were about 800,000 below trend in each of the last two years. So even taking into the downward trend in per capita construction the “surplus” should be gone in at most a year or two.

    Of course all of this analysis is completely undermined by the fact that more and more people are doubling up on housing leading to steady vacancy rates.

    Something to do with depressed NGDP?

  4. Gravatar of Lorenzo from Oz Lorenzo from Oz
    20. January 2011 at 22:02

    I have always had a problem with the notion of “excess supply” hanging out there on its own. I, mean, really, have we discovered finite wants all of a sudden?

    Now, finite demand, that makes sense. (Noting the difference between demand and wants.) Including in creating prices below production cost (which I will grant as “excess supply”: normal caveats about responsive prices apply).

  5. Gravatar of Bryan Willman Bryan Willman
    20. January 2011 at 22:37

    “difference between demand and wants” is really the key.

    There is clearly no shortage of people who would be happy to consume a house. That is NOT a saturated need/want.

    The trends of interest (sadly) are not housing stock vs population/households, but rather, housing stock vs households-that-can-pay-a-mortgage. (Or are willing to attempt it.)

    So, the ratio of “mortgages somehow available” to “households that could sensibly support a mortgate” is probably the real ratio to study.

    The run-up in real-estate prices suggests an overall *shortfall* of housing stock (otherwise why would the prices be bid up?), which may have been fed by a bubble of dubious financing. Now that the bubble-financing has gone, housing prices are falling back towards trend (but still above it in at least some places!)

    The housing industry will suffer until the supply of mortgage-worthy borrowers improves. Which should not be confused with people who would like, or might somehow deserve, a house.

    Because housing construction is driven by the marginal change (growth in the supply of mortgage-worthy households) it will struggle regardless of the ratio of housing stock to households, until/unless the pool of households with financing improves.

    (This would change slightly if everybody started paying cash for houses – but mortgage-worthy just becomes savings-in-hand.)

  6. Gravatar of Markus Markus
    21. January 2011 at 02:33

    Your data only shows construction per capita. That doesn’t say much. Construction can go down for many reasons without any shortage. An economy of 10 million people can perfectly sustain construction of 2 million a year, if they don’t have any houses yet. But an economy of 100 million people can not, if they already have 120 million houses. There is no reason to assume there must be a correlation between population and newly built houses. What matters are the houses actually present on the market. Also, just saying it’s fair to build as many new homes as you have immigration is too easy. First of all, those immigrants need to be able to afford them. And then, the homes must actually meet their demands. Having 2 mio poor immigrants from Africa doesn’t justify building 2 mio luxury apartments. (I’m not saying that was the case, I just want to point out the problems you get if you are only looking at aggregates)

    But if you want to make the case:
    Please give us a chart that shows actual existing houses per capita over the same time span.
    You could also add one that shows unoccupied homes per capita. That would be even more interesting.
    I think those two would say a lot more than the one you provided.

  7. Gravatar of EF EF
    21. January 2011 at 03:53

    Do the 5y and YTD vacancy graphs look the same for anyone else?

    As you can see from the table, housing construction in 1998-2007 was only 8.4% above the levels of 1978-87.

    I share Markus’ concerns.

    You and DeLong seem to base your argument on a premise that housing is consumed. Housing seem pretty durable to me: lots of people live in homes built in 1978 and many decades prior.

    How does per capita dam construction compare to 1978 or 1938? This might mean we have a dam shortage, or it may just mean we’ve damed up all the good rivers.

    the problem isn’t that too many houses were built […] but rather too little demand, because people have too little money.

    Please outline a moral system of distributing this new money we need. Bernanke giving billions to his friends at Chase and Goldman Sachs while millions lose their homes and jobs is not such an example.

    I see nothing immoral about Chase and Goldman Sachs going bankrupt and housing declining to prices people can afford to pay with money already in existence.

  8. Gravatar of OGT OGT
    21. January 2011 at 06:21

    The answer is slower housing formation.

    # Households = Population / Persons per households

    Household size fell in the seventies and eigthties and has sense leveled off.

    Here’s Calculated Risk’s Bill McBride:

    Household formation is a function of changes in population, and also of changes in household size. During the ’70s, the baby boomers started moving out of their parents’ homes, and there was a dramatic decrease in the number of persons per household. And that lead to a huge demand for apartments (the surge in total starts).

    The second graph shows the persons per household since 1947. Persons per household has been declining for over a century, but there was a fairly sharp decline starting in the late ’60s and all through the ’70s.

    The second graph shows the persons per household since 1947. Persons per household has been declining for over a century, but there was a fairly sharp decline starting in the late ’60s and all through the ’70s.

    More recently persons per household had been fairly flat. And there has been some recent research that suggests the household formation was lower, and therefore persons per household might even be higher, than the Census Bureau estimates. See from Amy Hoak at MarketWatch: Number of U.S. households falls by 1.2 million…

    Because of the changes in household size, the U.S. needed far more additional housing units in the ’70s and ’80s than in the ’90s and ’00s. If we could normalize the housing start chart by household formation, we would see that the last decade was indeed extraordinary!

    http://www.calculatedriskblog.com/2010/04/housing-impact-of-changes-in-household.html

  9. Gravatar of Morgan Warstler Morgan Warstler
    21. January 2011 at 06:40

    No one is arguing there are TOO MANY homes.

    We are saying, the WRONG people own the homes (bansters).

    IF, in 2008, we forced the bastards into a prone position an commenced a vigorous molestation of their hard assets WITHOUT any financial assistance.

    The cost of rents and the value of home prices would be correct today, and more of those kids not be living with their parents.

    Indeed the entire economy would be singing along…. likely with a with a smaller GDP.

    And NOTHING you ever argue proves this is false, because you rely almost exclusively on “sticky wages!” – which is a sham.

    As policy goes, our goal is to undermine the public employee unions at all costs – doing this has required a near bankrupting of US fiscal policy – this is the final card to be played of the Reagan strategy (1981), “I did not come here to balanced the budget.”

    Man up Sumner, do not go all wobbly on us now. We are about to WIN. With public employee unions destroyed there will be NO meaningful financial support politically for the Democrats – and the entire working model of the right will be vindicated.

    You have to think LONG TERM, and accept we have been in since 1980. We’re about to use state bankruptcy to end the public employee pensions (Teachers), and Texas is about to show the difference between state budget gaps that are pension driven and those that are truly just revenue driven.

    The ONLY real danger is Fortune 1000 vs. Local Wealth – my affectionate term for the top 2% of SMBs that create all new job growth.

    One last note: This is why you aren’t yet trusted by the right… from DeKrugman:

    “What this says, however, is not that the economy couldn’t and shouldn’t be producing more; it just says that we should be pushing harder on unconventional monetary and fiscal policies.”

    You see how he INTERCHANGEABLY blends monetary and fiscal?

    That’s why you fail.

    If you love A, and you let someone else keep saying A = B.

    You don’t really love A, if you don’t kick the shit out of them for demeaning your beloved A by mention B int he same breathe.

    And you Scott are too busy giving DeKrugman lap dances to see we JUDGE YOU based on whether they hate you for killing B.

    I told you before, your Nobel rests on whether you are the guy to kill off the concept of Fiscal Stimulus.

  10. Gravatar of Morgan Warstler Morgan Warstler
    21. January 2011 at 06:46

    “I have always had a problem with the notion of “excess supply” hanging out there on its own. I, mean, really, have we discovered finite wants all of a sudden?”

    lol. no, we had bailouts, which allowed the banks to sit on the homes rather than go bankrupt and sell them for a song to the SMART guys who took money out of the market – so they could buy the hard assets up cheap and put them to use.

    A guy who buys 6 homes at $1 auctions, he doesn’t KEEP THEM EMPTY… he doesn’t worry about mark-to-market.

    My god, at least be intellectually honest – there’s plenty of demand when you don’t prop up price.

  11. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. January 2011 at 06:56

    OGT,
    The more data we get the better understanding we have.

    Look at the table of “Households Added due to Population Growth and Changes in Household Size” in the link you posted. If you sum up the two sources of household formation you’ll notice the following by decade: 13.4 households million formed in the 1980s, 12.6 million formed in the 1990s and 12.7 million formed in the 2000s. That’s a very slight downward trend but not terribly inconsistent with Sumner’s rough estimate of a constant need for new housing.

    Of course there are other factors at work here as Markus alludes to. Total housing stock may have been increasing at a faster rate than number of households on average during the last three decades. But not even knowing the precise numbers that should be addessed by estimating the trend in housing construction per capita as I took a brief whack at above. It’s still hard to find that “surplus”.

  12. Gravatar of Dan Carroll Dan Carroll
    21. January 2011 at 07:05

    The problem of excess supply is not a function only of total population, but a function of homeonwership rates, which reached an alltime high during the boom. Since your discussion didn’t include a discussion of apartment/rental vacancies and price/rent ratios, it appears to be incomplete. Rental vacancies are now declining and rents are rising, which shouldn’t be surprising.

    Indeed, in America, homeownership is for many a rental in disguise – a way to take advantage of the many subsidies available to homeowners but not available to renters (though it is complicated because renters also get indirect subsidies). 3-5% down when total transaction costs are 8-10% doesn’t strike me as a purchase in any economic sense.

    We, of course, have stranded homes that are not likely to be used at a value anywhere near their construction value.

    btw, homes are too consumed – they are consumer durables that require considerable maintenance in order to have an indefinite useful life.

  13. Gravatar of scott sumner scott sumner
    21. January 2011 at 07:07

    Nick, Yes, now I realize that you did a post on this. Have I added anything to your argument? Maybe some data suggesting that today the problem in housing is 100% AD, and that we wouldn’t have to even drop prices below normal if we had this housing stock and 5% NGDP growth. But you already had the basic idea. I’ll add an update.

    Brian, Yes, that is exactly my argument. And the solution is more NGDP.

    Mark, Thanks for doing that work. I agree that it shows it’s still mostly AD, and I’m right that vacancies should have fallen sharply since March 2008, but have risen slightly.

    Lorenzo, I agree.

    Bryan, I agree, but that doesn’t really address my argument that falling NGDP reduced the demand for housing.

    markus, No the data shows total construction, not per capita.

    Housing production reflects population growth, which in the US is stable at about 1% per year, and some to replace houses that are destroyed (a small and stable part of the total.) So construction should be relatively stable over time (albeit cyclical.) My point is that the last few years are well below any reasonable estimate of normal absorption given 5% NGDP growth. I say it’s the recession causing vacancies to stay high. What’s the alternative explanation for the lack of absorption?

    Also read Mark’s comment above.

    EF, You said;

    “You and DeLong seem to base your argument on a premise that housing is consumed. Housing seem pretty durable to me: lots of people live in homes built in 1978 and many decades prior.”

    No ironically in my next post I say it isn’t consumed very fast. We build more mostly due to population growth, but also more second homes with greater affluence, and to replace homes torn down.

    You said;

    “Please outline a moral system of distributing this new money we need. Bernanke giving billions to his friends at Chase and Goldman Sachs while millions lose their homes and jobs is not such an example.”

    If you follow my blog you know I am a fierce critic of Fed policy. I favor ordinary OMOs and I oppose the Fed “giving” anyone any money. The new money should be sold to people like you and I at market prices (in exchange for bonds.)

    BTW, it’s not really true that the Fed gives people money.

    You said;

    “I see nothing immoral about Chase and Goldman Sachs going bankrupt and housing declining to prices people can afford to pay with money already in existence.”

    I see something immoral about the Fed doing a tight money policy that causes NGDP to fall and causes millions to become unemployed and unable to afford houses.

    OGT, That helps a little, but it doesn’t really address the problem of 2008 to 2010. Whatever reasonable rate of absorption you assume is “normal” for 2008 to 2010, we were way, way below that rate. And second, that study simply assumes away the problem. They note households are getting larger. We know the birth rate has not risen, I wonder why households could be getting larger? Could it be that 20 somethings are now living with parents? And why would that be? Is it because they like living with their parents, and don’t want their own place? Or because falling NGDP made it very hard for 20 somethings to find jobs? I think you know my answer to that question.

    Until someone can explain why the absurdly low level of housing construction just happened to occur after the biggest drop in NGDP since 1938, and yet vacancies have not fallen at all, I’ll continue to insist we have a demand problem.

    The study also fails to address the second home boom in the 1990s (at least your summary, I haven’t read the whole study.)

    You said:

    “See from Amy Hoak at MarketWatch: Number of U.S. households falls by 1.2 million…”

    Exactly!! That proves my point.

  14. Gravatar of Doc Merlin Doc Merlin
    21. January 2011 at 07:15

    “This got me wondering about the commentators who insist that easy money caused America to build a vastly excessive number of housing units, and that’s why there are record housing vacancies today. ”

    Not so much that, it may or may not have happened. It immaterial. What we believe is that it caused people to treat housing as an investment instead of an expense. This caused an oversupply of housing, not not an over quantity supplied, but rather that houses went to the market at much higher prices for the same quantity.

    Don’t confuse quantity supplied with the supply curve.

  15. Gravatar of scott sumner scott sumner
    21. January 2011 at 07:16

    Morgan, You said;

    “No one is arguing there are TOO MANY homes.”

    Read my post, people are arguing that.

    You said;

    “I told you before, your Nobel rests on whether you are the guy to kill off the concept of Fiscal Stimulus.”

    I have a number of posts showing fiscal stimulus doesn’t work. Now where is my Nobel!!

    Mark, Thanks for that data.

    Dan, Rental vacancies is the wrong data for my argument, you need total vacancies. My claim is that total vacancies should have fallen with such low construction. They haven’t. The only explanation that make sense is too little demand.

    You said;

    “We, of course, have stranded homes that are not likely to be used at a value anywhere near their construction value.
    btw, homes are too consumed – they are consumer durables that require considerable maintenance in order to have an indefinite useful life.”

    I agree with the first point, and it’s because NGDP fall (nationally–in local markets like Detroit you’d have too many under almost any circumstance.)

    I agree that homes require maintenance, but it doesn’t affect my basic argument.

  16. Gravatar of scott sumner scott sumner
    21. January 2011 at 07:18

    Doc Merlin, I’m not making that mistake. I agree we built too many houses in 2002-06. I’m asking why we have a glut today.

  17. Gravatar of honeyoak honeyoak
    21. January 2011 at 07:47

    Sumner, you are right. the housing story appealed to the Austrian side of me but the evidence that you have brought to bear has convinced me otherwise. US housing was just too small a part (estimates are about 2-4 trillion) assuming a 50% loss on those assets that still leaves a huge gap unexplained. furthermore, the global magnitude of this recession makes such just so stories suspect. it just cant explain the depth and magnitude of this recession never-mind the unemployment in places where housing was not a big part of the picture (like my home province of Ontario with 8% unemployment).it is easy for the journalists to go to some rickety house with 5 hot tubs in the exurbs and blame animal spirits for such buffoonery while ignoring the largely unseen contributions to the housing stock in places where it was sorely needed (NYC anyone?).

  18. Gravatar of Markus Markus
    21. January 2011 at 08:11

    Sumners: “I say it’s the recession causing vacancies to stay high. What’s the alternative explanation for the lack of absorption?”

    Well of course it is. But that’s a tautology. You could just as well build 2 million great homes in some third world country and than blame their bad economy for the fact that nobody has enough money to buy them. That is precicely what a misallocation is like. Well, you would call it lack of aggregate demand. But you completely ignore the capital structure of an economy by only looking at aggregate numbers.
    If you do that you can never have too much of anything. Why not have two homes for everyone? People who can afford it often have two homes. So let’s just increase the money supply so that everybody can afford two homes. The only reason not everybody has two homes yet is that the money supply isn’t growing fast enough.
    But if you look at the capital structure instead it would be terrible to build so many homes because there are thousands of things that people prefer over a second home (many even over a first home). And in a world with limited ressources you have to decide what to do first. Of course, this problem doesn’t show up on aggregate numbers, so you don’t care about it.
    Let me ask you a question:
    If you had an island nation with little farm land and they produced just enough food to keep everyone alive and they had reserves for 5 years. Now suddenly they experience population growth; so they use every idle ressource to build homes for the increased population. Just enough so that everybody has a place to live. But after five years their food reserves are eaten up and the farm production still only produces enough output for the smaller population. So some parts of the population begin to starve.
    I would say that they build too many houses, i.e. they should have used these ressources to increase the food production first.
    You show me two aggregate charts and say: “Well housing production has just kept even with population growth, so everything was fine there”.
    (I am not saying that the story was as simply in reality as my example. But you are saying that problems like this can’t occur or at least that they can be fixed if we just increase the money supply. And with all due respect that simplification is not as convincing as you think. If you want more people to follow you on NGDP targeting you need to find better answers to problems like this)

  19. Gravatar of OGT OGT
    21. January 2011 at 08:29

    Sumner and Sadowski- I don’t disagree that we have a demand problem. The increase in housing supply after 2007 is very likely a demand issue. Though that doesn’t, to me, imply that we didn’t have too many housing units built in 2002-2006.

    Even if there were too many built and one estimates that a certain percentage of units were built in the ‘wrong’ places I don’t think the magnitude of the economic slow down can be attributed to simple housing investment misallocation without some multiplier via the finance system and/or monetary policy.

  20. Gravatar of Thomas Sewell Thomas Sewell
    21. January 2011 at 08:52

    Supply and demand in a relatively free market is a result of the price level.

    To say supply of something is too high, you have to also say at what price. Saying we have a glut right now is saying that supply is too high _at current price levels_, or the converse, that demand is less than supply _at current price levels_.

    Normally, you’d fix that by prices adjusting lower until supply and demand matched.

    So the actual important question is not “Why do we have a glut”, but, “Why are housing prices higher than they should be to balance to market?”

    I would point to housing market distortions like banking regulations, mortgage bailouts, tax credits for purchasing homes, mortgage interest rate deductions, mortgage “readjustment” regulations, environmental and “affordable housing” policies (in some local areas).

    I would also point to the additional penalties (financial and credit/reputational) currently associated with selling a house for less than the mortgage on it. Of course, that’s a result of mortgages loans with too much margin for any “investment”, which is a result of so many other factors that most are familiar with.

    You may have some other ideas.

    If you went to a stock broker and said, “I want to buy $250K worth of stock and I’ll put $1K down in order to do so to cover the paperwork costs”, they’d laugh you out of the place. Somehow our current government policy is that they will not only encourage 33 times(VA loans) to infinite times (USDA 102% loans) purchases on margin, they’ll actually provide a loan guarantee for some of them!)

  21. Gravatar of Infinite Margin Investments | Come, Let Us Reason Together Infinite Margin Investments | Come, Let Us Reason Together
    21. January 2011 at 09:10

    […] response to America's Housing shortage., I'm posting the […]

  22. Gravatar of Morgan Warstler Morgan Warstler
    21. January 2011 at 09:32

    Scott,

    It isn’t the argument you make it’s whether you soundly DEFEAT DeKrugman.

    If the cost of crushing DeKrugam is letting Sumner print money and win a Nobel… you will be rewarded when he is defeated.

    You’re supposed to have a knee-jerk reaction to him equating A=B. It must raise your bile.

    Waldman is already doing the praise them while you stick in the knife stuff – the tricky libertarian stuff.

    Your job is to bring the hard Milton Friedman macro – and that guy WOULD CRUSH DeKrugam. Krugman on Milton:

    “The answer, I suspect, is that he got caught up in an essentially political role. Milton Friedman the great economist could and did acknowledge ambiguity. But Milton Friedman the great champion of free markets was expected to preach the true faith, not give voice to doubts. And he ended up playing the role his followers expected. As a result, over time the refreshing iconoclasm of his early career hardened into a rigid defense of what had become the new orthodoxy.

    In the long run, great men are remembered for their strengths, not their weaknesses, and Milton Friedman was a very great man indeed””a man of intellectual courage who was one of the most important economic thinkers of all time, and possibly the most brilliant communicator of economic ideas to the general public that ever lived.”

    Scott, stop licking the face of an idiot, and stop letting DeKrugman be-smudge your thinking by standing next to it. Draw mutually-exclusive contrasts, and force liberals to bend, and you’ll get a giant megaphone from the right.

  23. Gravatar of Morgan Warstler Morgan Warstler
    21. January 2011 at 09:35

    “I agree we built too many houses in 2002-06. I’m asking why we have a glut today.”

    Answer: Bailouts and not forcing mark-to-market has kept price from crashing.

    Scott, PLEASE admit that ever house would be sold and rented if they went to auction for $1.

    There is no difference between this an my Guaranteed Income… you can’t support one and not the other.

    It is one thing to say prices or wages are sticky, it is another to champion policies that KEEP them that way, and use that as proof.

  24. Gravatar of Doc Merlin Doc Merlin
    21. January 2011 at 09:42

    @Scott
    Treating housing as an investment good will do that. Physical assets get treated as investment goods during periods of excess monetary expansion (but really they are just hedges against the expansion) which causes excess leverage (and prices) to build up in that sector. Look at the silver and gold boom in the 70’s for a good example. When money relatively contracts from the path it was on, the entire system collapses, /hard/. The gold crash that followed the 70’s wasn’t as felt in the economy, because (1) unlike housing, gold wasn’t a huge part of average people’s lives, (2) the demand curve for gold isn’t nearly as steep as that for housing.

    @Honeyoak:

    1. Leverage explains the rest of the loss. The Austrian story, results in assets falling in price, leverage results in them falling /a lot/. Since the housing market is extremely leveraged you end up with this.

    2. You underestimate the role of the housing market. Its more than 40% of US family and individual savings.

    3. The demand curve for housing is very steep, so small changes in supply have a very large effect on equilibrium price.

  25. Gravatar of assman assman
    21. January 2011 at 11:01

    There is another explanation that nobody considers: land-use regulations. Land use regulations increase the price of houses which become unaffordable and this is why aggregate demand decreases. In this case the decrease in aggregate demand is a rational response to the increased cost of housing.

  26. Gravatar of TheMoneyIllusion » A missing explanation for why the National Journal says we have missing jobs TheMoneyIllusion » A missing explanation for why the National Journal says we have missing jobs
    21. January 2011 at 11:21

    […] In my earlier housing post, I should have cited this Nick Rowe post on a housing “Phillips […]

  27. Gravatar of Philo Philo
    21. January 2011 at 12:12

    Why don’t housing prices fall, to clear the housing market? And why don’t wages fall, to clear the labor market? Why are prices/wages sticky? (Twenty-five words or less, please–I don’t want to have to read another long post!)

  28. Gravatar of Anton Tonev Anton Tonev
    21. January 2011 at 13:14

    If you look at Residential construction spending as a % of nominal GDP though, it is clear the spike in 2002. Historically that percentage is around 3-3.5% and then in 2002 it is clear it broke from the previous pattern and started rising to a high of 5.5% in 2006. There may have been a good reason for the increase in residential spending in 2002 – as in US population has substantially increased in the last two decades prior, while at the same time residential spending as a % of NGDP was more or less unchanged, but surely there was an element of excess – not necessarily in the absolute sense more so in the relative sense – too much houses built in too short of time. By the way, right now we are at the other ridiculous excess where residential spending is only 1.7% of NGDP.

  29. Gravatar of Morgan Warstler Morgan Warstler
    21. January 2011 at 17:52

    “Why don’t housing prices fall, to clear the housing market?”

    Because rather than make the insolvent banks for bust and sell off the assets to the guys who got out early (the smart guys who deserve to win):

    1. Bailouts and TARP.
    2. Scott keeps screaming that we should print money.
    3. Scott keeps screaming that housing prices aren’t really that high.
    4. Scott keeps screaming that Banksters deserve to make huge cash.

    As you can see in 1-4, Scott Sumner is 75% responsible for why home prices don’t call.

    Oh if you push him, he’ll say “well I argue for x” (in a soft voice – a sentence here and there).

    But, he’ll never read chapter and verse, for days on end about policies meant to hasten insolvent banks into bankruptcy. He has no anger at the Bailout, he was “against it.”

    Just as you can’t be a Keynsian if you don’t keep government spending down in good times, you can’t be a NGDP economist if you don’t actively kick the legs out from under price supports anywhere you find them.

    We REMEMBER Friedman because he was a rabid free market guy, so when he spoke of lessoning Monetary policy, we could let him try it.

    Oh yeah a short answer: the bailouts and no mark-to-market. The Fed works for the banks.

  30. Gravatar of scott sumner scott sumner
    21. January 2011 at 18:45

    honeyoak, Very well put.

    Markus, You said;

    “Well of course it is. But that’s a tautology. You could just as well build 2 million great homes in some third world country and than blame their bad economy for the fact that nobody has enough money to buy them. That is precisely what a misallocation is like. Well, you would call it lack of aggregate demand. But you completely ignore the capital structure of an economy by only looking at aggregate numbers.
    If you do that you can never have too much of anything.”

    I’m afraid you haven’t followed my argument. It certainly is not a tautology. Even with 5% NGDP growth, right now we’d have too many homes in Detroit, and too many in Vegas.

    Markus, It’s a given you can have people build the wrong stuff. But that doesn’t explain unemployment, which is what I’m trying to explain. Your island doesn’t have unemployment.

    OGT, you said;

    “Though that doesn’t, to me, imply that we didn’t have too many housing units built in 2002-2006.”

    I said:

    “Yes, it’s true that we exceeded that number every single year from 2002 to 2006, and the total excess production was about 1.87 million units. That’s a lot.”

    Sounds like we agree.

    Thomas, I agree the price should adjust to provide equilibrium. Obviously it hasn’t yet. And I agree there are many complexities that help explain this. But I think given those complexities more AD would speed the adjustment process. Houses sell quicker in a strong economy, even though there is always a price where it can sell.

    Morgan, You said;

    “Scott, PLEASE admit that ever house would be sold and rented if they went to auction for $1.”

    OK, I admit it.

    Doc Merlin, You said;

    “@Scott
    Treating housing as an investment good will do that. Physical assets get treated as investment goods during periods of excess monetary expansion (but really they are just hedges against the expansion) which causes excess leverage (and prices) to build up in that sector.”

    I treat it like an investment good, because it is an investment good–much more so that a factory. A factory is more like a consumer good.

    assman, I answered that in my newer post.

    Philo. I don’t know. (with 22 words to spare.)

    Anton (and everyone.) I have an interesting thought on your data showing a rise in housing spending as a share of GDP. (or maybe it’s a stupid thought.) Haven’t land prices risen sharply in many places as a share of house prices? In principle, only the house, not the land, should be in GDP. Could this have distorted the figures?

    Philo, Read Morgan’s later comment. It turns out I am to blame for sticky house prices.

  31. Gravatar of Dirk Dirk
    22. January 2011 at 09:36

    I’m suddenly wondering if you and DeLong aren’t attacking a strawman here. It is true that a lot of people think too many homes were built, but isn’t the main conventional narrative not that the quantity of homes was too high but that the price of residential real estate went too high? This high demand also caused more homes than normal to be built those years, but when the real estate market crashed many people defaulted (I wish I could find those numbers) and of course the number of new starts fell quickly as (superficial) demand fell.

    The difference between your narrative and the conventional one is the emphasis: both suggest money became tighter, but you emphasize that it became too tight whereas the mainstream emphasizes it used to be too easy. But isn’t the result the same in terms of quantity of houses built each year and vacancy rates?

  32. Gravatar of Jim Caserta Jim Caserta
    23. January 2011 at 04:04

    Instead of looking only at flows, you should also look at levels (reasoning to follow):
    http://quickfacts.census.gov/qfd/states/00000.html
    129M housing units, 100M households. The housing unit number is from 2009, but the households is from 2000. Even if you had 15M households created from 2000-2009, how does that even remotely imply a shortage of housing?

    One of the ignored facts about housing during the bubble (except by guys like McBride) is that a very large share of purchases were for non primary residences – either vacation or investment. There has been a degree of that going on for a long time, but much less so now. So what you were looking at as a replacement rate for household creation, also included a large factor for second/vacation/investment properties.

    Also wrt the bubble is the geographic dependence. Your dismissing the local housing excess, is not much different than Greenspan saying that some areas are frothy. The nationwide decline in home prices is represented by some large areas experiencing very large declines, and many other areas seeing very modest declines. The same would be true of excess housing.

    This then goes to prices. What does excess housing in Miami have to do with home prices in North Carolina? Maybe if you’re talking vacation property, but most people drive to their beach homes in NC, so a Miami condo is not a replacement. If you look at % overhang of 2009 housing relative to 2000 households, NC = 35%, FL = 41%, CA = 17%, NV = 52%, and AZ = 45%. CA is the outlier, but 5-15% extra housing is a huge number and when easy money is gone, puts an enormous downward pressure on prices. The downward pressure on prices was and is also geographically dependent.

    Construction is not dictated by raw demand numbers but the price of new homes relative to existing homes. There is a significant premium for new now, and if existing home prices fall further that premium will get larger. It can be somewhat absorbed in areas where land makes up a significant share of the cost of a new home, but construction costs are fairly sticky. So the only way to get more housing construction is to have home prices increase. How is that going to happen?

  33. Gravatar of Old Whig Old Whig
    23. January 2011 at 11:30

    Whether or not there were to many, to few or average houses built my take on the crisis and easy money creating a housing bubble is this;

    As being a Swede living in the US I shook my head in 2005-2006 on the affordability of housing. What I mean us that I couldn’t figure out how people in my hometown in Florida could afford to pay for the houses the bought, built. For me it seemed that  people were buying houses 50-100 % larger than they could afford. In my opinion this us only explained by easy money. 

    I come from Sweden and in Sweden a middle class house is between 1,300-1.600 sq ft. A upper middle class home 2.000-3,000. Larger homes than that is only for the top 1% 

    In my home town even regular middle class people purchased plus 3.000 sq ft. 

    In my Florida town low income persons bought plus 2,000 sq ft homes. In  Sweden nobody is allowed to buy a house if you can’t afford it, no matter that your a minority and/or social disadvantaged. 

  34. Gravatar of ssumner ssumner
    23. January 2011 at 20:00

    Dirk, I’m getting huge pushback–so it isn’t a strawman I’m attacking.

    Jim, Yes, second homes were a factor, and not surpringly a severe recession reduces the demand for second homes.

    Old Whig, America’s much richer than Sweden, Even before this boom American houses were much bigger than European houses. Poor people in America live in houses similar to middle class houses in Europe.

  35. Gravatar of Auntiegrav Auntiegrav
    15. February 2011 at 04:26

    A house is a location. The amount of money spent on the house is actually irrelevant to the future needs. The usefulness of a house is whether it enables someone to be useful (near a job or using the land). We have spent the last 100 years putting people in locations that are accessible only with cheap oil and automobiles. The housing situation is a reflection of the demand for automobiles, which is a reflection of oil prices and jobs.
    Immigration?
    What are people FOR? The real issue over immigration is whether or not the people we already have are being useful to their own future, and whether they can accomplish that usefulness with the numbers available. Immigration policies are based upon exploitation, not usefulness. People cannot be exploited for profit without cheap energy to do/make stuff. The cost of energy is getting higher than the costs of labor, so there isn’t the same impetus to bring them into the country as there was during Operation Paperclip (1945-1976).

  36. Gravatar of FT Alphaville » A US consumption conundrum FT Alphaville » A US consumption conundrum
    3. June 2011 at 12:08

    […] to say how much this particular item should trouble us. At least a few economists have noted that the rebound in rents is the result of a housing shortage, at least for […]

  37. Gravatar of More Thoughts on Austrian Theory « Unlearning Economics More Thoughts on Austrian Theory « Unlearning Economics
    17. December 2012 at 12:53

    […] other and hence have small amounts of capital misallocation; in fact, there is a shortage of housing in many developed countries, while existing houses remain highly priced. This doesn’t make […]

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