A Construction Recovery Is Likely, A House Price Recovery Less So

A picture taken on March 22, 2012 shows a viaduct under construction to enlarge the A36 highway in Arbouans, eastern France

Photo by SEBASTIEN BOZON/AFP/Getty Images.

When I note that I’m bullish on housing some people look at me like I’m crazy. This is often followed by questions about “shadow inventory” of houses with delinquent mortgages that are likely to become tomorrow’s short sales. This is because we’re generally talking about two different things. What I’m bullish on is the idea that residential construction will be a positive contributor to economic growth moving forward, but since most blog readers don’t work in the construction industry they want to know about house prices.

These are different issues. The case for construction bullishness is fairly simple. The issue is that the construction boom was big, but the post-boom bust has been even bigger. Consequently, the ratio of people to houses in the United States is now at a very high level by historical standards. This works because the average size of the American home is very big by global standards. Consequently, it’s perfectly possible for twentysomethings to live with their parents or for put-upon middle aged people to move in with siblings as briefly happens in Wanderlust. But moving forward it means that two things can happen. One is that as non-construction employment grows, the Fed can relax about the fact that rents are going up as people move out of mom’s basement. It’s true that these higher rents boost measured CPI, but they also provide the fuel for a renewal of house-building. More people employed building houses means more demand for other kinds of workers, and we have a positive feedback loop getting us back to full employment. The other possibility is that the Fed strangles the recovery and we undergo a structural shift in the organization of American society to become more like Italy, where it’s normal for adult children to live with their parents for many years. My guess is that the Fed won’t strangle the recovery and we will get a big renewal of home building.

But will the price of your house actually go back up? Maybe if you live in an overregulated coastal housing market (although even here, plausible future appreciation may have been baked into the cake already) but almost certainly not if you’re talking about Florida, Arizona, Nevada, Inland Empire, and other places where there are few regulatory constraints on supply. The madcap speculative bubble in land prices is not something we should expect to come back.