The boom and subsequent bust of housing construction and prices over the 2000s are widely regarded as a principal contributor to the Financial Panic of 2007 and the subsequent “Great Recession”. As of this writing, housing market activity remains at depressed levels as the economy slowly resolves the legacy of excess supply and sharply lower prices. Over 2.6 million foreclosures have been completed since 2008 and 1.9 million foreclosures are in process. Much has been written about the demand side of this pronounced housing cycle, in particular the innovations in mortgage finance and loosening of underwriting standards that greatly expanded the pool of potential home buyers. In this paper, we take a closer look at developments on the supply side of the housing market. Following a short literature review, we begin with a descriptive review of housing production, sales, and prices at the national, regional, and state levels. We then look at developments in the home building industry over this period. We also take a closer look at land markets using a quarterly price index for MSAs with both elastic and inelastic housing supplies across the United States. An important question is to what extent the supply side of the market contributed to the boom/bust dynamics. A second question is whether the significant changes in the industrial organization of the home building industry exacerbated or ameliorated this supply impact.

The increase in housing production from the early 1990s through 2005 and the subsequent downturn are notable in several respects. First, both the upturn and downturn were of relatively long duration. Earlier housing construction cycles were characterized by a trough to peak intervals of only a few years rather than a full decade. A second distinctive feature was the role of the multi-family housing supply. Earlier cycles were characterized by increases in the construction of both single-family and multi-family housing. In contrast, over the most recent cycle construction of new multi-family housing was relatively constant. Lastly, while total housing starts per capita at the peak in 2005Q3 were not particularly high compared to the 1960s and 1970s, as seen in Figure 3, at the peak residential investment was the highest share of GDP since the mid-1950s. Several factors contributed to this development. First, as already noted, the increase in housing production was primarily of single-family units, which tend to represent a much larger “value-put-in-place” per unit than do multi-family units.