A home in San Francisco, where a short supply of housing has contributed to a rise in prices.ROBERT GALBRAITH/Reuters
The headlines are just a little heady: the U.S. housing market is baaa-ack. Well, not back to where it was, but back to where people act like housing is a sought-after commodity. The statistics tell a nice story: U.S. housing prices, as chronicled by the Standard & Poor's Case-Shiller Housing Price Index were up by an annualized 11 per cent in March (the last month for which data is available); for some markets, such as Phoenix, prices are up by as much as 20 per cent. Whew, glad that that price depression thing is over and everything is back to normal – right?
Well, not so fast.
A new paper from Bank of Canada economists Narayan Bulusu, Jefferson Duarte and Carles Vergara-Alert looked at data from on the U.S. housing market from 2000 to 2010. For the first six years of that period, housing prices were up sharply, while from 2006 through 2010 they were down a ton. The economists examined what happened in separate metropolitan areas, looking for something specific: The degree by which supply factors affected things on the way up and on the way down.
There many theories as to why the U.S. housing market rode the roller coaster for a decade, but a lot of them relate to price and demand factors. We know, for example, that interest rates were kept very low for a long time, particularly because the U.S. economy needed a boost following Sept. 11. As well, people just wanted homes, and they wanted bigger homes. There was a bubble phenomenon going on in the markets, just as was the case for tulips a hundred years ago and tech stocks more recently.
The role that supply has played in the U.S. housing meltdown has not been explored in a lot of detail up to now. We know how it might play out, though: If you do not have much supply, prices get bid up. If you have too much supply, they get pushed down. All things being equal, if supply fluctuates a lot, then you might see housing prices fluctuate a lot, too.
Indeed, the Bank of Canada economists found that supply played a fairly significant role in the U.S. in the first decade of this century. They found that in 19 of the largest metropolitan areas in the U.S., supply constraints contributed 25 per cent to the rise in housing prices from 2000 to 2006. That is, during those years supply was relatively tight, and prices rose more than they would have otherwise. From 2006 to 2010, in contrast, they found that supply factors caused 17 per cent of the fall in housing prices. The most significant boom-bust cycles were seen in cities such as Miami, where space issues made it difficult to increase supply quickly – but once it was increased, you needed a lot of demand to absorb the new construction.
Which brings us back to the present, and the so-called "recovery" in U.S. housing. You could argue about what a "real" recovery consists of, but I would say it happens when you have a sustained increase in demand pushing up prices. And yes, we are seeing some of that this time around. U.S. buyers (those who now qualify for a mortgage, which is much tougher than it was before the subprime crisis) have been saving money for years and are attracted by low interest rates. However, it is not the case that there are so many qualified buyers that prices are being bid higher. What is happening is that there are a limited number of those buyers, but they are finding that there is an even more limited stock of housing.
In markets such as Phoenix or San Francisco – places were prices have risen the most in recent months – the supply of housing is still very tight. That's largely because many homeowners are still in a negative equity position – they owe more on their houses than they can possibly receive from selling. Under the circumstances, they do not have an interest in putting their homes on the market. When things do stabilize a bit more they will list those homes, and that will drive prices down again, although by a little or a lot is hard to discern.
So call it a housing recovery if you want. But keep a close eye on the stock of housing if you are trying to time its duration.
Linda Nazareth is the principal of Relentless Economics Inc. and a senior fellow at the Macdonald Laurier Institute.