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What housing supply glut?

Summary:
Kevin Erdmann's blog has made me much more aware of the very strange way we look at housing. Here's an example from the Financial Times: More than a million new apartments have sprung up across the US in a post-crisis construction surge. Now bankers who funded the boom are worried: have developers built too much? As concerns grow about a supply glut, financial watchdogs this month began scrutinising how the largest lenders would cope with a property market crash. . . . While a simulated property downturn has long been part of banks' annual "stress tests", the Fed has made CRE risks a bigger focus this year, reflecting increasing worries that bubbles are forming in parts of US real estate. Eric Rosengren, head of the Boston Fed, last month singled out "trendy" apartment buildings in big cities, highlighting that prices had "increased sharply". Other policymakers, including Fed chair Janet Yellen and comptroller of the currency Thomas Curry, have also made cautionary comments.Oddly, when I studied economics we were taught that a simultaneous increase in price and quantity was an indication of a rise in demand: The FT articles cites higher prices and higher quantity, and concludes that supply has increased. Perhaps the Fed has a more sophisticated model that has superseded the old reliable S&D workhorse.

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Kevin Erdmann's blog has made me much more aware of the very strange way we look at housing. Here's an example from the Financial Times:

More than a million new apartments have sprung up across the US in a post-crisis construction surge. Now bankers who funded the boom are worried: have developers built too much?

As concerns grow about a supply glut, financial watchdogs this month began scrutinising how the largest lenders would cope with a property market crash. . . .

While a simulated property downturn has long been part of banks' annual "stress tests", the Fed has made CRE risks a bigger focus this year, reflecting increasing worries that bubbles are forming in parts of US real estate.

Eric Rosengren, head of the Boston Fed, last month singled out "trendy" apartment buildings in big cities, highlighting that prices had "increased sharply". Other policymakers, including Fed chair Janet Yellen and comptroller of the currency Thomas Curry, have also made cautionary comments.


Oddly, when I studied economics we were taught that a simultaneous increase in price and quantity was an indication of a rise in demand:

What housing supply glut?
The FT articles cites higher prices and higher quantity, and concludes that supply has increased. Perhaps the Fed has a more sophisticated model that has superseded the old reliable S&D workhorse.

But has quantity increased? I could not find data on multifamily units, but FRED has a graph on total housing construction:

What housing supply glut?
In fact, over the past decade housing has experienced an unprecedented slump. Could the FT article be rescued if we were to focus on multifamily construction? I doubt it. Since 2008, it has become harder for people to qualify for mortgages, and thus housing demand has switched from single family to apartments. Rents have rising rapidly, especially in bigger cities. This is how markets are supposed to work after a shift in demand (put aside the question of whether regulatory changes that caused the shift are appropriate.)

When I look at the data, I see a reduction in the supply of housing causing an increase in rental prices.

To summarize:

At first glance it looked like the FT article confused supply and demand shifts, not understanding that higher prices accompanied by higher quantity implies an increase in demand, not supply.

At second glance it's even worse, as the FT got its basic facts wrong. Housing construction has been at unusually low levels during recent the past decade. Indeed even lower than that graph implies, as the total US population is much higher than during the 1960s.

Update: Several commenters provided links to multifamily construction, which is running at about 400,000 a year. This is modestly above recent decades.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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