Academic journal article Monthly Labor Review

Is the U.S. Housing Market about to Improve?

Academic journal article Monthly Labor Review

Is the U.S. Housing Market about to Improve?

Article excerpt

According to conventional housing models, new home construction is cyclical and generally lags behind changes in home prices. Because of the lag in new home construction, the supply of new homes tends to increase after home prices rise and decrease after the price of homes declines. In a traditional supply-and-demand relationship, home prices would fall when a weak economy causes the demand for new homes to slacken. Demand would drop off when mortgage interest rates rise, and would expand when personal income grows and when homebuyers expect home prices to appreciate.

In "When Will the U.S. Housing Market Stabilize?" (Economic Letter, Federal Reserve Bank of Dallas, August 2011), John V. Duca, David Lutrell, and Anthony Murphy suggest, however, that booming home prices and new home construction in the mid-2000s were not solely attributable to traditional demand drivers such as low unemployment and personal income growth. The authors cite the relaxed mortgage credit standards implemented by lenders during the "subprime boom" as a key driver for increased housing demand. Lower down payment requirements caused upward pressure on housing prices, which led to a surge in new home construction.

At its peak in 2006, construction of single-family homes during the subprime boom reached 1.8 million units per year, well above the 1.1 million units required to accommodate population growth and replace physically depreciated structures. …

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