Housing Construction: When Will It Resume, And at What Levels?

Housing construction will resume when housing prices are anticipated to be at or above construction cost for the duration of time it takes to build a house.

Okay, when will housing prices be anticipated to be at or above construction cost for the duration of time it takes to build a house? That will occur when the demand for housing is expected to exceed the current stock of housing. The U.S. stock of housing, measured in year 2000 prices, was $12.9 trillion at the beginning of this year. If demand continued to follow the trend of the 1990s (a period without a housing boom), then at the beginning of this year, the demand for housing at 2000 prices would have been $12.6 trillion. In other words, we need a sustained demand increase of three percent in order for the houses we have to be worth construction cost.

During the 1990s, demand increased an average of 0.2% per month (2.4% per year). At that pace, demand would reach $12.9 trillion (today's housing stock) by April 2009. Below is a chart showing actual housing and 1990s housing trend. Notice from the chart below that the trend exceeds this year's actual value before the beginning of 2010.

click to enlarge

If demand returned to the 1990s trend, there are a few reasons why housing construction could resume sooner than April 2009:

1. Some of the housing built during the 2000s boom may have been built in the wrong places, so the current housing stock is over-valued at year 2000 prices.
2. Although in hindsight we can say that housing demand that was high enough to sustain boom time prices never materialized, housing demand might still have increased beyond the 1990s trend (that is, the housing boom was exaggerated but based on something real, wasn't it?).
3. Houses are depreciating for the usual reasons, plus some additional neglect due to the foreclosure process.

Of course, we are in a recession and a financial crisis now, which may reduce demand below the 1990s trend. Also, the actual stock has not been frozen at $12.9 trillion because a bit of building has occurred this year. I expect the size of this demand reduction and the contribution of 2008 construction to be small, and therefore expect to see housing construction resume next summer, if not earlier.

Epilogue: When Will Housing Prices Return to Boom Levels?

Boom-time housing prices were much above construction cost, and therefore much above where I expect them to be next summer. It will take either general inflation or another housing boom for housing prices to return to boom levels. Some other economists and I have recommended some inflation, but if that recommendation is not followed and inflation rates continue in the 2-5%/year range, it will take a number of years for housing prices to return to what they were in 2005 or 2006.

Disclosure: None

Comments

[sickofthehype:]

Inflation, it's already fixed in the system and will start hitting 2009. Just watch. It is inevitable.

2008 Dec 08 09:52 AM

[Tom Armistead:]

A house is privileged from an income tax point of view, deducting interest payments and not paying capital gains. That is attractive, investments such as equities may seem too risky after the market did so poorly this year.

So the house could become the main investment again, and price appreciation would resume on that basis.

2008 Dec 08 12:13 PM

[Smarty_Pants:]

If I were a housing contractor, I'd be visiting every local bank REO department to offer them a deal on a foreclosure maintenance program.

I believe there is more to be made keeping empty houses salable than there is to be made building new houses and it is likely to stay that way for some time.

2008 Dec 08 02:43 PM

[User 232593:]

they are building the wrong house. it should be 1,400-1,600 sqft on about 1/4 acre & it doesnt have to have a granite counter. it should have a 40 yr mortgage with a no heloc provision as the buyer should be cautioned that the roof overhead is not the atm machine.with 20% down the bank should be required to hold this loan & not sell it.

2008 Dec 09 11:35 AM

[billp37:]

New construction is causing electric load problems.

www.prosefights.org/ab...

There may be electricity shortages within several years.

2008 Dec 09 12:34 PM

[notsosmart:]

dont worry about electricity.the saudis are building solar generating plants(plenty of sun in the desert)to sell power.LOL.what are we building? money printing plants?

2008 Dec 09 12:39 PM

[mjones:]

We have enough houses...We dont need any more built. Find something else to do until the supply gets cleared out....I`m sick and tired of these whiney home builders saying we need to give all these insentives to buy houses. That is what got us in to trouble in the first place and you were not complaining when you were selling all those houses. Let the market fall and correct and people will buy when they feel they have come down to where people can actually afford them...The maybe some people can save and actually put money down and not have to borrow so much....

2008 Dec 15 03:08 PM

[Investagato...:]

How much does it cost to build an average house, per square foot? In my small town, contractors are still asking for $90 plus! This is for a 90 - 100% masonry house with attached double car garage, granite counter tops, tiled and/or carpeted floors, all electric, above avg. appliances. The half acre lots in this neighborhood sell for $8 - 10k. Any builders? Have lumber & other materials prices come down in the past several months? Are labor rates coming down with the recession?

2008 Dec 15 06:05 PM

[classicurba...:]

It is impossible to answer the price per square foot question. Too many factors play in - small house or big house, two story or one story, pier and beam or slab or piered slab foundation, etc. You can only look at price per square foot when comparing comparable houses. Our houses (in Dallas) are about 3,700 to 4,200sf, two story, 4 bed, 3 bath, high quality finish out. Cost per square foot is around $100 to $115.

Lumber is down, concrete is up, labor is about the same. Anything petroleum based will come down soon.

On Dec 15 06:05 PM Investagatornotinwesta... wrote:

> How much does it cost to build an average house, per square foot?
> In my small town, contractors are still asking for $90 plus! This
> is for a 90 - 100% masonry house with attached double car garage,
> granite counter tops, tiled and/or carpeted floors, all electric,
> above avg. appliances. The half acre lots in this neighborhood sell
> for $8 - 10k. Any builders? Have lumber & other materials prices
> come down in the past several months? Are labor rates coming down
> with the recession?

2008 Dec 17 10:40 AM