Tuesday, February 14, 2017

Housing: Part 207 - The Glut of Houses

This is covering old territory, but I thought this chart was worth tossing up here.

Source - table 8
This should show the massive misallocation of capital into housing during the 2000s bubble.  The huge run-up in housing units, fueled by loose credit and cheap money.  A run-up so massive it would take years to work off.  Bernanke noted in 2011, "Builders would start construction on only about 600,000 private homes in 2011, compared with more than 2 million in 2005.  To some extent, that drop represented the flip side of the pre-crisis boom.  Too many houses had been built, and now the excess supply was being worked off." (The Courage to Act, p. 503)

Millions of extra homes must have been built in order to create inventory that would take that long to work off.  There are a lot of books on the bubble that I haven't read.  I can only assume that this data appears somewhere.  Maybe they have a different version than I do, or maybe my scale is messed up.

I see two frequent comments about Closed Access real estate.

1) The supply limit is due to geography.  There just isn't a way to build much in those cities.

2) Markets are getting hot.  There is a bit of a bubble.  Skylines are dotted with cranes.  There is too much building.  Rents are starting to soften.  The building market needs to pull back before it creates another boom and bust cycle.

These two observations are mutually exclusive.  Either there is a geographical limit to building, in which case, all potential building can only partially accommodate the demand for housing in those cities, or there is the potential to build too much, leading to a bust.  It's one or another.  Functionally, we appear to govern as if we believe both at the same time.  So, we make excuses for the lack of building that keeps rents high, and then, when enough building occasionally makes it through the political gauntlet to actually cause rents to moderate, we, maddeningly act like that is a problem to solve.

The idea that geography is the limiting factor here is wrong on its face, in either case, which is clear simply by opening one's eyes.  Are developers throwing up their hands in the Closed Access cities because there is just no developable land to purchase, or do they have many potential projects that are stuck in political limbo?  Is anyone going to honestly try to argue that if every building project in the pipeline now was fast-tracked, that developers wouldn't have any potential projects to follow up with?

This is the odd position we are in because of Closed Access policies.  Closed Access is an unstable equilibrium.  The current rent and price levels of Closed Access homes depends on exclusion.  The price of Closed Access homes contains an implicit assumption that millions of low-income households will have to move away for lack of affordable housing.  Dislocation is baked into the Closed Access market.

If there was ever enough building in those cities to heal that future dislocation, home prices in that city would collapse.  A natural supply and demand equilibrium would be destabilizing in the short run.  It would lead to billions of dollars in capital losses.  So, we govern the economy to maintain an unstable equilibrium, where the unmet demand for Closed Access housing is balanced against expectations of future supply deprivation and future dislocation of disadvantaged residents who Closed Access cities just won't make room for.

There is no way to balance that equilibrium.  In places like Texas, the equilibrium is basically the cost of building, and supply and demand shift to maintain that basic balance.  But, since Closed Access has come to define our economy, and since we have managed to address it with delusions of attribution error, we bounce from boom to bust, always nervous about the next big kick in one direction or another, because so much wealth in Closed Access economies is derived from the presumed ownership of exclusionary policies in the far future, which are imputed into the prices of those restricted assets today.


  1. Great post.

    Add in huge capital inflows to USA to property zoning...


    So we have a propertied and financial class wedded to property zoning...and singing the virtues of free enterprise.

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