The Supply Side of the Housing Boom and Bust of the 2000s

The boom and subsequent bust of housing construction and prices over the 2000s is widely regarded as a principal contributor to the financial panic of 2007 and the ensuing “Great Recession.” As of this writing, it appears that single- family housing starts are finally beginning a gradual recovery roughly seven years after their previous peak in 2005:Q3. Nonetheless, the overall level of housing starts and sales remain at depressed levels as the economy slowly resolves the legacy of excess supply and sharply lower prices. Based on the CoreLogic national index, home prices have fallen 30 percent from their peak in early 2006, returning to levels that prevailed in mid- 2003. Roughly one in four homeowners with a mortgage has combined mortgage loan balances that exceed the value of the property. Over 2.6 million foreclosures have been completed since 2008 with 1.9 million foreclosures in process.1 Another 1.3 million loans are currently ninety or more days delinquent and very likely to move into the foreclosure process.
Much has been written about the demand side of this pronounced housing cycle, in particular the innovations in mortgage finance and loosening of underwriting standards that greatly expanded the pool of potential home buyers. In this chapter, we take a closer look at developments on the supply side of the housing market, and bring prior theories and previous analysis of housing supply face- to-face with data from the 2000s cycle. We focus our discussion on four key issues.

Andrew Haughwout, Richard W. Peach, John Sporn, and Joseph Tracy

NBER

August 2013

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