Housing is both an investment and a consumption good. Its production is almost prosaic in its use of simple resources like lumber, yet its financing involves trillions of dollars in mortgages that were central to the recent global financial crisis. As different as a two-by-four may be from a complex collateralized mortgage-back security, the simple fundamentals of housing supply are central to understanding housing markets, the securities that are tied to them, and America’s economic geography. The financial aspects of housing were the focus of attention during the last cycle and housing investors in Las Vegas during the boom mistakenly concentrated on low-interest rates rather than the ease of building in that metropolitan area. Ten years after the housing boom peaked and four years after the bust cratered,1 policy advocates now worry more about the amount of affordable housing in high-demand areas than the exposure of investors to housing-related risk. Interest has also grown in the role that high home prices play in the distribution of wealth (Rognlie, 2015; La Cava, 2016) and even aggregate output (Hsieh and Moretti, 2015).

Housing supply helps determine affordability, wealth inequality, and the relatively modest employment growth in productive places like Silicon Valley. In this essay, we review the basic economics of housing supply and the functioning of U.S. housing markets to better understand the impacts on home prices, household wealth, and the spatial distribution of people across markets. Section II documents the state of housing affordability in the U.S., and begins with three core facts about housing supply. First, when the building is unrestricted by regulation or geography, housing supply curves seem relatively flat, meaning that we can approximate reality by referring to a single production cost. Second, both geography and regulation severely restrict the ease of building in some parts of the country. These constraints raise building costs both directly, by increasing time delays and reducing the amount of available land, and indirectly, by ensuring the homes are produced more on a one-by-one basis rather than in bulk. Third, the supply of housing is kinked and vertical downwards because housing is durable (Glaeser and Gyourko, 2005).