Brad Delong continues on a theme that needs more emphasis

Zombie Claim #2: America has overinvested in housing and needs the construction sector to be depressed for a while.

  • To the contrary, the housing bust has now been much longer and deeper than the mid-2000s housing boom–we are now far below trend in the cumulative number of houses built:

FRED Graph  St Louis Fed 4

The issue is a constant conflation of home prices with home building. The later was unprecedented, the former was entirely precedented as you can see in the graph above, home building was actually higher in the mid-1980s.

What is unprecedented is the home building bust.

Here is another chart comparing prices and housing starts since the 2000 when the Case-Shiller 20 city index began

FRED Graph

These are real home prices in blue and housing starts per new resident in red.

The same graph using the 10 city index, starting in 1988

FRED Graph

The run-up in home starts was correlated to the run-up in home prices but was much more mild. On the other hand the collapse in starts was far more pronounced than the collapse in prices.

This seems like the exact pattern you would expect with downwardly rigid prices. The boom is reflected more in prices than in production. The bust is reflected more in production than in prices.