Bill McBride's Calculated Risk offers more raw information,
statistics, and charts about our economy than your typical blog.
I found myself nodding my head as I read this commentary-here.
He wrote a year ago:
"[T]here is still far too much existing home inventory, a
sharp bounce back in housing starts is unlikely, so I think
a rapid decline in unemployment is also unlikely.
He wrote on the 22nd:
"Usually near the end of a recession, residential invest-
ment (RI) picks up as the Fed lowers interest rates. This
leads to job creation and also household formation - and
that leads to even more demand for housing units - and
more jobs, and more households - a virtuous cycle that
usually helps the economy recover.
"However this time, with the huge overhang of existing
housing units, this key sector isn't participating. So in this
recovery there is less job creation, less household
formation, and less demand for housing units than in a
normal recovery. This is sort of a circular trap for both
GDP growth and employment that will persist until the
excess housing units are absorbed.
Many people have written at great length about the "great
recession". One aspect that I think does not get talked about
enough is the cause of McBride's "huge overhang of existing
In the year 2000, market study gurus projected that Central Ohio
could absorb 6,200 new homes per year. Between 2000 and
2006, the production building industry built some 8,600 MORE
houses than the market studies said Central Ohio could absorb.
In other words, by January of 2007, forgetting any other issues
with the economy, there was more than a year's surplus of newly
built homes available in Central Ohio.
Judging from what I read in the papers, the production building
industry replicated this behavior all over the country. In some
of the "hot growth" markets, I suspect they overbuilt to an even
The building spree was great news while it lasted. Lots of
construction jobs, lots of supplier jobs, lots of developer jobs.
Construction became the engine for our economy.
Unfortunately when the industry should have been gently
applying the brakes, say 2003, it got caught up in the mass
hysteria of "real estate values always go up" and stepped
on the accelerator instead.
This is one of Calculated Risk's fun charts. It shows the
pace of home building over the years. Click on the chart to
enlarge it, or go here. Nothing in our economic history
would suggest that a building spree like we enjoyed from
2000-2006 was possible, or sustainable.
If we are lucky, we may see a return to the building levels
of the 1990's by 2013. It would be an accomplishment,
and recovery, we could be proud of.
Wishing for a return to 2003-2006 is asking for trouble.
It is just not sustainable.