How Large Would Our Construction Industry Be If We Were at Full Employment Right Now?
Quite large, I think. Scott Sumner agrees, and presents the argument:
TheMoneyIllusion » America’s housing shortage: Housing construction normally seems to fluctuate between one and two million units. Let’s take 1.5 million as roughly the trend rate which keeps up with population. Yes, it’s true that we exceeded that number every single year from 2002 to 2006, and the total excess production was about 1.87 million units. That’s a lot. But over the next four years there was a shortfall of about 2.6 million units. So why do we seem to have a hugely excessive number of homes, if we are actually 730,000 short?....
The year 2008 was the first year below a million since my records began in 1978 (and probably much earlier.) That’s clearly below any reasonable estimate of normal absorption. Then in 2009 and 2010 we were down close to a half million units, a mind-boggling low rate of construction. Vacancies should be plunging under any reasonable estimate of market absorption. But guess what: over the past three years there has been no decline in housing vacancies... vacancies have leveled off since March 2008 at just under 19 million units, up from 16 million in early 2006.
Given ultra-low construction and US population growth of about 3 million/year, there is only one explanation for that pattern. Astoundingly low demand for housing. Do young people actually enjoy living with their parents, or might America be experiencing an aggregate demand shortfall?
Another reason we need more NGDP.
This was spurred by a Chicago alumni magazine article that made the following claim:
Economic recovery will be slow, [Erik] Hurst says, because the massive misallocation of resources that the housing boom created cannot be quickly remedied. During the ten years after 1997, he said, 40 percent more housing was constructed in the United States than in any decade on record. Today 2.3 percent of single-family homes are vacant, an increase of more than 64 percent since 2005.
The housing oversupply, in turn, has contributed significantly to high unemployment. As the construction industry boomed, much of the American workforce shifted to housing-related industries, on both the construction and banking sides. Now, of 3 million open jobs in the United States, only 65,000 are in housing-related fields, Hurst said. Thus, many unemployed workers are qualified for jobs that are no longer available—jobs, he predicts, that won’t come back.
This is completely inaccurate.... [H]ousing construction in 1998-2007 was only 8.4% above the levels of 1978-87. And it was much lower in per capita terms. The 2.3 million single family homes that are vacant are probably little changed from a few years ago, whereas the number should be plunging with low construction. There is no reason construction jobs shouldn’t come back, unless we shoot ourselves in the foot....
If all you knew was the housing construction data from the noughties, you’d expect another 1.5 million homes a year to be built in the teens, just like other decades. I’m not saying that will happen. Indeed I think it won’t happen. But if it doesn’t there will only be two possible explanations; a crackdown on immigration or a prolonged NGDP deficiency (perhaps combined with supply-side problems with the labor market.) It won’t be because we built too many houses in the 2000s. We didn’t.
