Housing’s Bullish Supply-Demand Squeeze

The rebound in housing “seems to have caught almost everyone in the business by surprise,” the New York Times reports. Surprising or not, the revival is real. As the story reminds, there’s growing demand for housing amid a shrinking supply. Those features suggest that the recent strength in housing, which is a critical pillar of support for the US economy these days, will roll on.

The numbers tell the story. For example, the chart below tracks the last 10 years of new housing starts (red line), new one-family homes sold (black), and the monthly ratio of home for sale to homes sold (blue). The sharp drop in the supply of homes for sale is the key trend here.

The ratio of homes for sale to sold has declined to pre-bubble levels last seen in 2005. As the population grows and household formation rises, the dwindling availability of residential real estate is fueling construction and sales. It’s still a modest revival, but it’s likely to be persistent. As Catherine Rampell’s story notes, “Extraordinarily low mortgage rates don’t hurt, either.”
No wonder that the trend in housing starts continues to look bullish, as the February update in housing starts suggests. The future’s as uncertain as ever, but it’s encouraging to see that newly issued housing permits reached another post-recession high last month, which tells us that construction activity will probably move higher in the months to come.