Sunday, June 28, 2009

Housing Was Not Massively Overbuilt

It’s widely taken as a given that because we have too many empty housing units now and because prices have collapsed, that housing was overbuilt. For example, from Unnatural Rent:

In addition, the recession and rising unemployment have slowed down new household formation, encouraging people to live with roommates. In many markets, apartment rents are unlikely to post any growth during this year, and some may even see declines.
This drop in demand has been combined with a massive increase in the supply of housing (both single family and multifamily) over the past decade. While office and industrial did not experience a huge wave of overbuilding, that isn't quite the case for retail and multifamily.

This is true in a sense – if we had fewer housing units now the situation would be better.  However, throughout the bubble years supply and demand were balanced. My argument is premised on the idea that additions to housing supply should roughly correspond to additions to employment:

1 new job = 1 additional unit

Obviously, not every person who gets a job creates a new household, but households are also created without jobs, and in my experience nothing too bad happens to housing markets where job growth exceeds new housing additions. The data for job creation and residential permits issued since 2004 is summarized below:


Supply and demand were in synch until 2007. In 2008, demand went off a cliff, which goes to show that jobs can be lost faster than residential development can wind down.

I think this data also supports the notion that the bubble price escalation was driven by easy financing, and not fundamental demand.

Employment data is from this BLS website, permit data at this Census Department website.