America’s No-Vacancy Problem: Blame Government
How long does it take for the U.S. economy to build a house?
The question matters as signs of a shortage appear in parts of the housing market: Land ready for building is scarce, few homes are for sale and construction workers are putting in more hours than ever before. That's because houses aren't built in a day. If demand rises quickly enough, it will strain the ability of the market to supply new homes, and government is making it worse.
It's best to think of the housing market as a pipeline. It takes a while for the end producing houses to respond to the end selling them. So if demand conditions change sharply -- as they are now -- that can spawn a bottleneck as production tries to catch up.
In July, 200,000 more permits were issued than homes were completed, a sign of a rapid change. Yet nobody, as far as I can tell, has answered how quickly the housing market could respond with new supply if put under pressure. It's a problem in a real market that could have important macroeconomic consequences.
Using data from 1968 to 2013, the statistical best-guess of how long it takes to build a home - that is, to bring it from a permit to a completion -- is six months. That construction lag explains 84 percent of behavior in housing completions. But that's not all. Construction sometimes stalls after permitting, though this lag doesn't actually appear significant in aggregate data. And the estimate overlooks the time it takes to convert what's called "raw land" into a "buildable lot."
This is a less familiar but ever-longer part of the housing pipeline. It's mostly government. Zoning papers need their i's dotted and t's crossed. Utilities have to be configured. Land has to be cleared. Environmental compliance and other land-use regulations must be checked and met. This process can take years, though we don't have good data on this.
And what data exist point to bottlenecks ahead. Futures contracts for lumber have risen steeply since 2009. There were 840,000 buildable lots for sale at the end of 2012, a six-year low, and land demand has strengthened in 2013, according to Zelman & Associates, a research firm.
How could we relieve the bottlenecks? It's widely argued that land-use policies burden the economy -- Matthew Yglesias and Ryan Avent both have bemoaned them in recent books -- and impending production bottlenecks in the housing market are a new reason for local governments to act now. Nobody wants the U.S. to build hotels in six days or skyscrapers in 15, as does China, but faster permitting would allow the country to better accommodate a housing recovery.
Inventories of new one-family homes have been rising for the last six months. That's good news, because the housing market can't recover if there's nothing for sale. But if it keeps getting stronger, expect more attention to the housing pipeline, from government, homebuyers, and builders alike.
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Evan Soltas at firstname.lastname@example.org