How Does an Excess Supply of Houses Get Remedied?

By: Paul_L_Kasriel

By allowing prices to fall and by cutting production. This remedy applies to everything from hods to houses. It is well documented that the prices of houses have plummeted. What may be less well known is that newly-started production of single-family homes has come back into equilibrium with the sales of new single-family homes - at least through April.

Chart 1 documents that starts of single-family homes ran at a seasonally-adjusted annual rate of 368,000 in April, a touch above sales of new single-family homes at a seasonally-adjusted annual rate of 352,000. Chart 2 shows that in recent months the ratio of single-family house starts to sales of new single family home sales is at it lowest level in 47 years.

This is not to gloss over the fact that there still is a large supply overhang of new homes for sale that either have been completed or are under construction (see Chart 3). But again, markets work. The housing market is moving toward a new equilibrium with production being curtailed and prices falling.

Chart 1

Chart 2

Chart 3

Paul Kasriel is the recipient of the 2006 Lawrence R. Klein Award for Blue Chip Forecasting Accuracy

By Paul L. Kasriel & Asha Bangalore
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Copyright © 2009 Paul Kasriel
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.