New Research Predicts Housing Construction Recovery in 2014

Analysts at the San Francisco Branch of the Federal Reserve have authored a research paper detailing their position that the U.S. housing construction market will not fully recover until 2014. Even this estimate, however, is based upon a generous assumption that the number of foreclosed homes will decline by 50,000 every quarter starting in 2012. The estimate also assumes the adoption of policies that will help homeowners avoid foreclosures as the market moves forward. House prices must stabilize and then begin rising before housing starts can start to improve, because it is harder for new home prices to compete with those of distressed resale homes. For more on this continue reading the following article from Economist’s View.

There's a new paper from the San Francisco Fed discussing how long it will take for residential construction to rebound to normal levels. Here's the abstract:

When Will Residential Construction Rebound?, by William Hedberg and John Krainer, FRBSF Economic Letter: Over the past several years, U.S. housing starts have dropped to around 400,000 units at an annualized rate, the lowest level in decades. A simple model of housing supply that takes into account residential mortgage foreclosures suggests that housing starts will return to their long-run average by about 2014 if house prices first stabilize and then begin appreciating, and the bloated inventory of foreclosed properties declines.

The paper notes that price adjustment alone is not enough, "a significant easing of the drag on housing stemming from the inventory of foreclosed homes is also needed." For example, in this graph showing the predicted path for housing starts, the red line assumes a 50,000 per quarter decline in the inventory of foreclosed homes starting in 2012, which as the paper notes is an optimistic assumption. The black line assumes no decline at all. When foreclosures decline as assumed for the red line, the recovery time improves substantially (but note that the prediction of a recovery by 2014 depends upon the optimistic assumption about how fast foreclosures will drop):

An implication of this research is that polices that help homeowners escape foreclosure would speed the recovery of the housing market.

This blog post was republished with permission from The Economist's View.