The Supply of Housing Has Become LESS Elastic

We are now well into another housing boom but as shown by Aasteveit, Albuquerque and Anundsen this boom is in some ways worse than the previous 1996-2006 boom because the supply response has been lower. The first figure, for example, shows that since the trough in 2012 house prices have risen a little bit faster in this boom than in the 1996-2006 boom and they have risen much faster relative to income (HPI is housing price index).

Over the same time, however, the number of new building permits and housing starts has been lower than in the previous boom (top two panels of figure 2 below). If prices have gone up as much as before but quantity has not, it follows that the elasticity of housing supply has fallen. Occasionally it’s suggested that there is an “overhang” of housing from the previous boom but that is not true. If anything, as shown in the bottom left panel, there is a decline in the housing stock relative to population.

The authors suggest that one reason why the elasticity of housing supply has fallen is that developers are fearful of being hit in another bust. I find that implausible. Developers don’t hold onto their stock for very long and often sell even before completion so they worry at most about a year or so forward. A better explanation is that housing supply remains especially constrained in the coastal cities by regulation and limited land capacity and those constraints are becoming more binding over time–in other words, the previous boom filled the infill. It may also be the case that fear of the bust is increasing regulation as people worry even more about downward fluctuations in the price of their primary asset.

Either way, housing continues to eat the world.

Comments

The unspoken conclusion being that interest rates have little or nothing to do with it?

If we make housing a low-risk, high-reward investment through monetary policy (lowering interest rates to increase demand), wouldn't the trillions of artificial wealth created in the last two decades match the curve better than 80 year old zoning laws?

The problem is supply, not demand. Developers don't care whether the money used to buy their stock comes from a low-interest loan or not; the risk there is on the lender.

Would the money still be there were it not for low interest rates?

Well, the money that is on the table now doesn't seem to be enticing additional supply, so that question seems a little irrelevant.

This seems to be an effort to conflate the current housing boom with the 2007 bubble. The difference is that in the years leading up to the 2007 bubble the congress was pushing/demanding that lenders make loans to people who would not qualify and they doubled down on that stupidity by demanding that the lenders make those loans with little or nothing down. Congress caused the 2007 bubble but the current boom in housing is demand generated.

All those renters were just minding their own business when the feds busted in their door and demanded they take a no money down neg-am mortgage in Riverside or Las Vegas. No demand at all.

That's a good line if you don't mind telling lies. I suppose you could actually believe that BS, but either way it simply was never true. It was an excuse made up by losers who have made up excuses all their lives for their bad decisions.

That was easy.

"Developers don’t hold onto their stock for very long and often sell even before completion so they worry at most about a year or so forward."

I find this argument weak. I remember the beating developers like Pulte and Toll Bros took in 2009 with inventory that wouldn't sell and no new orders. A lot of new high rises are apartments instead of condos this time around.

That was when they were building in rural America. Rural America where making consumers poorer is a top GOP priority.

How can workers sufferer from relentless cost cutting have the higher income needed to buy single family detached homes?

Its bizarre economists today think the way to increase the supply of detached single family homes is by rezoning to promote multifamily houses, often priced as high as single family detached homes that have were build in rural areas around cities by the millions per year from 1945 to 2005.

But then, these are the economists who call for cost cutting, which always makes workers worse off, and that reached true success in killing infrastructure jobs building the most important driver of higher costs: transportation. It can be cars, or trains, light rail, buses, subways, streets. Then housing construction drives demand for high cost water and sewer. Followed by high cost schools, plus fire, police, parks and recreation.

The promise the GOP made to rural voters is costs won't go up, so that means the GOP must block housing development, which always drives up taxes, and other costs. Worse, the housing pulls in people who want city services in rural areeas, turning them into high cost, rising cost, cities.

Well, economists apparently also want to blame New York City and San Francisco (~5% of the population, if you're very aggressively counting) for those charts.

A significant portion of the economics profession is engaged in providing reasonable sounding excuses for what the wealthy already want to do, and then providing reasons why it was someone else's fault when things go south.

Just keep Versailles in mind and the noises you hear from the courtiers will make a lot more sense.

This x 1000

"A significant portion of the economics profession is engaged in providing reasonable sounding excuses for what the wealthy already want to do, and then providing reasons why it was someone else's fault when things go south."

ALERT ALERT ALERT

Tyler is trying to cover up the Epstein case to protect his Havard pals

!!!!!!!!

meanwhile
the Philadelphia police dept. came out looking pretty good
after last nights game

They lost 6-0. The fans were so upset some were calling for Santa to be deputized.

6-0 good point but
those nonviolent heroin dealers/socialjustice warriors are a tough team
with the homefield advantage.
should be re-educational to see how the postmodern sociologists deconstruct the game

The entanglement is exponential. It is unfair for an equal distribution to be distributed. It is a filibuster.

I think nationalizing housing could be a good idea. Brazil is building thousands upon thousands of houses for poor people, who pay it back at a later time with subsidized interest.
It has four benefits:
- It puts a roof above the heads of the virtuous poor;
- The Keynesian multiplier of civil construction is huge and infiltrates the economy creating jobs and income, giving rise to a virtuous cycle;
- It allows the government to slash taxes, allowing money to trickle down into the economy;
- It allows every key player to have a piece of the pie.

I know a couple of people you can ask about subsidizing loans for low-income borrowers. Names are Freddie Mac and Fannie Mae.

Evidently, there were mistakes here handling the subprime issue, but I think the Brazilian system is pretty solid, and any losses will more than made up dor in revenue. The important point, I think, is that Brazilians are getting things done.

Wrong. They do not serve low income home buyers. They serve the middle and upper class. They only buy notes covering 80% to occasionally 90%.

Its the various FHA programs that serve the low income buyer with low down payments, but also equity interests that prevent huge capital gains: when the property is sold, all subsidies and discounts are recovered retroactively from gains in sale price.

Do not confuse morthage packages of conforming loans, aka 80% mortgages sold with fannie mae insurance, plus a second mortgage sold with private mortgage insurance in seconday markets. The problem is, a default can not be resolved by fannie mae until after the secondary note holder agrees to take up to 100% loss. Fannie mae owes nothing until the secondary note holders willingly or are forced to take a 100% loss. Unfortunately, they refuse and obstruct, blocking property sale, the property is then abandoned and the price ultimately ends up at half the original 80% first mortgage, and fannie mae takes a loss.

I grew up and bought two houses when buyers had to put down serious cash. Then the trumpification of buying real estate became legalized in the name of free markets: private debt in excess of any rational valuation of the real estate based on the theory houses increase in value as they decay, as depreciation is an evil liberal concept, like human caused climate change. Get liberals out of the way, and houses will increase in value at no cost, going from two bedroom to five bedroom with family room and two car garage, based on price equals value. I'm an evil liberal who thinks housing value is defined by the number of bedrooms, etc, not an inflating price.

Housing issues are land issues. If the rental value of land were equally shared, housing affordabilty issues would disappear. Nationalising land/housing is a clumsy/inefficient way of doing this, while a direct tax on land's rental value is optimal.

Sure there will always be a need for some social housing of genuine hardship cases. But that would/should be a lot smaller than most people assume.

Maybe, but let us be realistic. We won't ever have a tax system that address the house affordability issue. The next best solution is the nationalization, and the Brazilian system shows us a way ahead, a way to get things done.

"Nationalising land/housing is a clumsy/inefficient way of doing this, while a direct tax on land's rental value is optimal."
I agree that a Henry George style land tax could work but Singapore was able to get public housing right as well and pretty much had to as they are land-constrained. There is more than one way to do this.

Evidently, there were mistakes here handling the subprime issue, but I think the Brazilian system is pretty solid, and any losses will more than made up dor in revenue.

"Developers don’t hold onto their stock for very long and often sell even before completion so they worry at most about a year or so forward."

This seems blatantly false. Surely developers make all kinds of investments in their business with a longer term impact than the time it takes to build one house. Decisions on purchasing equipment and hiring skilled employees would be based on more than a few month time frame. A lot of development occurs in new large subdivisions with many streets and areas, as well as integrated commercial property, amenities, services, etc. The timeframe for planning and executing a large development like that is far more than a year, and it requires plenty of upfront investment that will be lost if it is not completed.

Even if fear of another housing bust were irrational, it would likely still have an impact on the market, as people tend to over-learn from experience.

Not to discount regulation as one part of the explanation, but I would be surprised if fear of another housing bust were not one driver of this.

The role of regulation could likely be assessed by comparing new housing starts in different areas with different levels of regulation.

hiring skilled employees would be based on more than a few month time frame.

In the construction business even a slow-down of a couple of days means that workers are laid off. Nobody is kept on the payroll unless they're producing. Contractors take advantage of the fact that unemployment insurance subsidizes a labor pool into which they can dip whenever they need their men back.

That may be true of the lowest level guys, but people with specialized skills, managers, accountants, etc. are not so easy to replace.

Look at this list of the top home builders in the U.S. A large portion of new homes are built by builders who build and sell several hundred or more houses per year. These are not small organisations with just a few guys they can hire and fire at will. (I found data suggesting there were 617,000 new homes sold in 2017, so the top 100 builders would be roughly half that).

https://www.builderonline.com/builder-100/builder-100-list/2018/

I don't know how it is done in the US, but in Calgary and other large markets where the large tract developments are going on the developer had buyers, managers, sales and financing, and the building was done by small contractors. Someone with an excavator, someone else with a setup for camp proofing the foundation and blowing in crushed rock, another for forms and concrete, all the way up. There would be multiples of each competing on price. The developer who could keep them busy got the choice and availability. When things got slow the developer knew that they would lose their capacity to produce so they kept the subcontractors going as long as possible, at lower rates. When it died everything shut down, equipment sold or defaulted upon. It would take a year to get the capacity back.

Again i don't know if it the same in the US, but someone going and doing something else in 2008 and returning now would find it a totally different regulatory environment. Like the guy placing crushed rock having to deal with silica dust as if it is asbestos.

I don’t think developers own any significant equipment, and most of their “skilled” employees are sales and administrative, not crafts. Almost everything is contracted out.

Housing prices are also a function of commute times to central business districts. I find it much more likely that the solution to high housing costs will be new technologies in transportation that could allow people to live further from the city center. This is depressing because we have had the technology to solve this problem - the elevator - for over 109 years.

We might have elevators, but if the assumption is that there's a 1:1 ratio of people to parking spots next to homes, and the same when it comes to workplaces, tall buildings stop working so well, despite elevators.

The hidden secret here is that cities built under the assumption that everyone has an automobile are extremely difficult to upzone. The fact that families have multiple jobs to different destinations makes this even harder.

How does an elevator help get from one rural corporate campus to thousands of single family detached homes?

Why not trolley aka light rail? Elon's evolving "hyperloop"?

Oh, right, putting housing in rural areas, even "wasteland" costs too much in tax hikes to pay off bonds to pay workers to build schools, water and sewer, fire, police infrastructure. Paying workers costs too much, and high costs destroy wealth and ghat kills jobs.

Take for example Detroit. Building roads outside Detroit destroyed all the wealth in Detroit real estate, then drove up costs in rural areas outside Detroit that now became high cost dense suburbs with congestion, costly overburdened infrastructure, demands for costly services like Detroit had in the 50s like parks and museums. GM and Ford moved out of costly Detroit to the rural areas which became costly suburban cities, and then moved to the South to get low rural costs, with infrastructure they were exempted from paying taxdes to build.

This time the boom is over large parts of the heartland, especially the Midwest and Tier II cities , not the coasts.
https://www.wsj.com/articles/in-boise-and-grand-rapids-the-housing-market-looks-red-hot-11565521202

"In the past few decades, rural school districts, especially those in the Midwest, Southwest, and Deep South, have been folding their smaller schools into bigger ones, which are often many miles away. These schools close because of shrinking state funding, low enrollment, or simply a desire for efficiency—even as studies show small schools often have higher test scores, higher graduation rates, and better student participation in extracurriculars. Post-closure, Johnston’s ghost-town fears often become reality. Experts say that closing these schools can be counter-productive not just for the students, but for the entire population. Not only does the town fail to attract young families, who would rather live near a school, it often loses one of its main hubs of activity and community interaction."
https://www.nbcnews.com/news/education/class-dismissed-forever-rural-schools-face-closures-n141556

Jeffrey Brown:

Every morning, 6-year old Brady Schlamp boards the bus in Arena, Wisconsin, to travel the 10 miles to his new school in the neighboring town of Spring Green.

Just a few blocks away, Arena Elementary, a now abandoned building where Brady attended kindergarten last year. His mom, Deborah, says the transition has been tough.

Deborah Schlamp:

He's adjusting. Slowly, he's starting to make some new friends, which he's happy about. But I think he's sad some days, especially when we go by the school. Now we go by, and it's just — it's sitting empty. The playground is sitting empty.

Jeffrey Brown:

Empty schools closed to save money, it's happening in rural areas all over the country, including here in the River Valley School District in Central Wisconsin, which shuttered elementary schools in two towns in the last two years.

Some here commute to work in Madison, less than an hour away, and the area boasts attractions like Frank Lloyd Wright's home and studio, Taliesin.
https://www.pbs.org/newshour/show/how-schools-are-forced-to-close-as-rural-populations-dwindle

And I thought technology would allow everyone to work at great jobs anywhere, like in rural towns with lots of land for new housing, with community schools that are great for kids....

Big government leftist do control some Midwest cities and can drive up costs to pay good wages to attract workers, and businesses who want costly workers as customers so the businesses can be big costs to those workers who go out for a coffee or salad and sandwich.

What I don’t understand is the rising cost of housing outside the liberal,NIMBY, coastal cities has not been tampered by new construction. Austin, Houston, salt Lake, Durham, Atlanta have all experienced large increases since 2006 and my personal experience is that it is not easy to find affordable housing in these areas.

Well, if prices are going up, that’s an indicator that there isn’t enough housing being built to meet demand. When you have metros growing as fast in population as those, you need a lot of new housing.

Nope, it might just mean people's spending preferences have changed. In the amenity gain from proximity to nice locations, relative to others spending choices, has increased, so will demand.

This is what has happened. A good thing.

That would make sense, except in Durham, the increases in housing prices are occurring both in older neighborhoods and in the exurbs.

There is limited land. People don’t want to live too far away from downtown. You could build more vertically but when I was shopping around, it looked like high-rise buildings were more expensive. Many high-rise condos in my flyover city have taxes and condo fees of over $1,000 a month plus special assessments.

High-rises aren't efficient. They have unique, expensive problems.

Also, the limited land becomes even more limited when you start shopping for "good school districts."

The overlap between high-rises and "good school district" catchments is probably close to zero.

Where land is very expensive, high rises can be efficient. Just look At Manhattan.

High-rises are still expensive and require lots of expensive maintenance in Manhattan.

"There is limited land."

So, why are schools being closed because the population is falling and real estate prices falling cutting tax revenue to fund schools, and other public services in counties representing over 50% of US PRIVATELY OWNED land. Ie, very little government owned lland in Iowa, Kansas, Ohio.

The GOP political-economy policies are driving people out to the Democratic controlled land areas which have ben blocked from expanding, as they traditionally did, by the GOP who control the rural land around these Democratic controlled land areas with growing populations.

I've lived long enough to see pretty much every strategy used by conservatives to block cities expanding into rural areas and create wealth by increasing costs. Can't create wealth in the hands of workers without drivng up labor costs.

The Democratic controlled state legislatures can force municipal mergers anytime, and redraw county borders and school district lines anytime they wish. Democrats just don’t want to do it.

"...Developers don’t hold onto their stock for very long"

A housing developer I know got hit during the last crash not by being stuck with finished housing he couldn't sell, but by being stuck paying expensive carrying costs for 'dirt' that he couldn't profitably develop or resell. The planning horizons are longer when it comes to acquiring land to develop. Still, I doubt that fear of the next bust is a big factor.

In addition to regulation, I suspect construction labor shortages are also a factor (likely with immigration crackdowns having an effect given the numbers of undocumented workers in construction).

Construction labor shortages don't seem to have raised wages, however.

Are we sure about that?

https://www.marketwatch.com/story/construction-wage-gains-hit-9-year-high-as-builders-woo-workers-with-30-per-hour-pay-2018-11-02

Has anyone talked to a roofer? Or a plumber or HVAC guy? Or the owners of one of those small businesses?

The insurance is very expensive.

How much has this changed since the last housing boom?

Insurance prices are high because:

A) the business owners do not make keeping workers, bystanders safe from harm

B) deregulation and other conservative policies have restricted a free market so insurers charge premiums that far exceed their payouts on the few claims moral, ethical, businesses have.

It might be both. One business is causing lots of harms which get shifted onto the ethical businesses because bad actors simply shutdown one dba and move to another to get insurance priced assuming medium risk, when its risk is very high and sky high insurance premiums should prevent it from operating.

Perhaps regulations and laws making businesses liable for killing people and damaging property they dont own should be eliminated. But why would insurance be needed if there was no legal liability for causing harm?

I thought this past crash taught us that housing markets are very heterogeneous, so instead of talking about the "national" housing market (which doesn't exist), the analysis should at most be at the MSA level. If someone does that, then I'll pay attention.

Yes, it is my understanding that many smaller cities and rural areas in America are shrinking while many major metros are growing.

The towns that are shrinking are overwhelmingly controlled by conservatives, some old blue dogs, but mostly GOP pols, while the cities with too little housing and land are controlled by Democrats who are blocked from expanding as they traditionally have done, by conservatives who control the land outside the cities.

Conservative are the cause of the problem.

Its bizarre that conservatives thing the demand for detached single family homes is met by tearing down single family homes with private land and building multifamily attached housing with common land or building multistory housing with no land at all, except maybe public parks.

Conservatives have succeeded in limiting the supply of housing so they can profit from rent seeking.

This post is more subtle.

It is an argument for redistribution of wealth, so as to enable more people to enter the housing market.

.... and do what? By that I mean constant income stream.

Mulp is never subtle

Are all those “Democratic “ cities located in “Home Rule” states, as opposed to Dillon Rule states? The state legislature have the power to legislate municipal borders and county borders and force mergers whenever they please. Which is to say that it isn’t just Republicans who don’t want to live in SF, or LA, or Boston, or NYC proper.

In the US since 2015, the number of housing units increased by 1M more than the number required to keep housing units per capita constant.

Source?

US government census and housing completion data, along with Federal Reserve estimates of total housing stock.

One thing missing is accurate estimates of retired housing, but given estimates of average housing unit age, such retirement seems to be very low in most parts of the country.

The reliance on real measurements makes me skeptical of the results, extremely so since they use CPI which is known to handle house prices especially poorly (among other well-known flaws). I don't even see the need for real measurements in some cases, e.g. house prices scaled by income.

"A better explanation is that housing supply remains especially constrained in the coastal cities by regulation and limited land capacity and those constraints are becoming more binding over time"

And yet, high price points and coastal cities are the weakest performing parts of the national housing market right now. This is strong evidence against your hypothesis. If those markets were really supply constrained then their prices should be outperforming markets that are not supply constrained.

That assumes that there are not other external factors that might place an upward limit on prices in these cities (such as the fact that they are communist shitholes).

It's possible that the housing market in, for example, San Francisco would be even stronger if its policies not related to land use mirrored that of, again for example, Dallas.

In other words, do the cities who exercise stringent land use controls also happen to have other policies that drive down housing costs?

Or in other other words, is there a distinction to be made between housing prices driven by growth from residents moving in with few land use restrictions (Austin, Nashville, Atlanta, Houston) and prices driven from organic growth clashing with near-static supply (Seattle, Portland, San Francisco)?

"Developers don’t hold onto their stock for very long and often sell even before completion so they worry at most about a year or so forward."

Just because they can build and sell a house in less than a year doesn't mean that construction in general isn't constrained by those fears. It takes a lot longer than a year to buy the land and develop an entire sub-division or large apartment / condo building. That's where you would see significantly more housing, and recession / housing bust fears are definitely still in play for those projects.

This.

Economist unaware of actuality news at 11

The previous boom was centered on a few states. Some of the “boomiest” like Nevada and Arizona had abundant land and lax regulation. The YOY price increases we are seeing now are nothing like we had in the sand states from 2004-2006. I’m sure land use regulation plays a role; particularly in California, but it’s simplistic in the extreme to attribute all or even most of the current and past home price appreciation to it. Access to credit and interest rates play a much greater role.

Well, at least a good sign is that I don't see all the liar loans and banks wanting to lend you 105% of value.

Elasticity of durable goods is dependent also on the stock of used durable goods...each new house competes for occupancy with an existing house. So, if existing households are downsizing as they age, more old houses enter the market.

I don't know how you can talk about elasticity of new supply of what is a durable good without considering existing stocks, and shifts of populations from single family housing to apartments or nursing homes.

One of my statistics friends examines the price of auto replacement parts based on the stock of used automobiles and junk yard stock.

At some price point, the number of buyers is pretty low. The current typical rules of thumb are 3-4x gross income (it used to be 2.5x as I recall). There just aren't that many people who can afford a $1.7 million house.

"That means that at the end of the second quarter, the median price for MLS listed single-family houses in SF hit $1.7 million, while condo prices hit $1.3 million, up $80K and $65K, respectively, compared to last year."

"The median cost of buying a single-family home in the city of Austin has risen 10.9 percent, to $420,000, in the past year, according to an Austin Board of Realtors report released Wednesday.

The median price of homes in the larger Austin-Round Rock metro area—which includes a number of growing cities and parts of five counties around Austin—was $334,702 and rose 3.2 percent during the same period."

https://sf.curbed.com/2019/7/10/20689307/median-home-price-house-sf-san-francisco-2019

https://austin.curbed.com/2019/7/18/20699632/austin-median-home-price-increase

But what about this upscale neighborhood?
"Bismark Grove median real estate price is $151,341, which is more expensive than 62.3% of the neighborhoods in Kansas and 33.2% of the neighborhoods in the U.S.

The average rental price in Bismark Grove is currently $987, based on NeighborhoodScout's exclusive analysis. The average rental cost in this neighborhood is higher than 61.6% of the neighborhoods in Kansas.

Bismark Grove is a suburban neighborhood (based on population density) located in Lawrence, Kansas.

Bismark Grove real estate is primarily made up of medium sized (three or four bedroom) to small (studio to two bedroom) single-family homes and mobile homes. Most of the residential real estate is owner occupied. Many of the residences in the Bismark Grove neighborhood are relatively historic, built no later than 1939, and in some cases, quite a bit earlier. A number of residences were also built between 1970 and 1999."
https://www.neighborhoodscout.com/ks/lawrence/bismark-grove

"In the Bismark Grove neighborhood in Lawrence, KS, residents most commonly identify their ethnicity or ancestry as German (32.7%). There are also a number of people of English ancestry (11.4%), and residents who report Irish roots (9.4%), and some of the residents are also of Swedish ancestry (5.4%), along with some Mexican ancestry residents (4.1%), among others."

Its a great place for Trump supporters worried non-whites will replace them.

Just as one example, the average teacher salary in Lawrence is $54K, in San Francisco $74K. A 2 teacher couple can afford to buy the median house in Bismarck Grove, never in San Francisco.

If you want to talk about one income households ...

The dollar was 20% cheaper then. Inflation was running at 3%. Dunno how this effects the conclusions, just yet.

The authors suggest that one reason why the elasticity of housing supply has fallen is that developers are fearful of being hit in another bust. I find that implausible. Developers don’t hold onto their stock for very long and often sell even before completion so they worry at most about a year or so forward. A better explanation is that housing supply remains especially constrained in the coastal cities by regulation and limited land capacity and those constraints are becoming more binding over time..

The second statement is the reason why the first is wrong. Because the entitlements process is so complex in desirable areas, developers are often forced to think two to four years out, or even more in some cases. Single family developers do have some flexibility about delaying construction as the market softens, but by that time they’ve sunk years of work and lots of infrastructure and soft cost investments into the project. They will certainly feel the pain if they get caught in a downturn, even if they cut their losses.

I think a lot of people are "flipping" houses instead of building new ones. Building restrictions don't prevent you from renovating a dump and then selling it as a rental to an investor. Or splitting it into multiple condominums, or something (though that might also be restricted).
I've heard San Francisco recently loosened regulations of putting tiny "guest houses" in your back yard. So people are building these tiny home in their yard and renting them out.

I'm finally noticing quite a few apartment buildings under construction in the expensive San Fernando Valley.

My impression is that California has much longer lags than, say, Texas between increases in demand for housing and increases in supply.

In the UK the housing market lost a lot of capacity to build homes after the crash. The big house builders would always rather build at a slower rate and pump up the price.

I didn't see this point so thought I would offer: Building vertically does solve a lot of problems, yes, but the locations where the demand for building vertically exists are currently occupied by single-family NIMBYs who have a hugely anti-growth bent. Here in California these were the people behind the failure of SB50.

If you view a market as a "feedback control system" where when the market ticks up a bit, that drives an increase in supply, that dynamic stability of that system depends upon the relative dynamic time scales of the control object and the controller.

With construction times much less than the cycle times of the demand created by business cycle frequencies, the housing market will not create boom/bust bubbles. However, if you add an extra time delay to the response (permission time delays) to the construction response cycle, the dynamic system will create boom/bust cycles when the time delay (permission time) + actual construction time = demand cycle time.

We have made the housing market unstable by just adding "permission times" that delay the construction response time. Mathematically it is like putting a pillow over your house thermostat slowing the response time of the thermostat to temperature changes by the heater and causing oscillation in the room temperature or like the feedback on a microphone that we have all seen.

A simple dynamic housing model with cyclic market demand being driven by the business cycle and a construction time + permission time will show unstable cyclic dynamics and a boom/bust cycle when you increase the permission time. System dynamic software like Stella or iThink will show this boom/bust and overpriced housing. It is all just math, but the type of dynamic mathematics that economists don't understand but rocket scientists, electrical engineers, and system engineers do understand these dynamic problems.

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