Why we stopped building houses in 2008 in one chart

 

Housing location is a matter of trading off between rents and transportation costs (all else equal). When transportation costs fall, people are able to pay more in rent. Sometimes they allocate that surplus money to nicer digs, sometimes to more square footage. But when transportation prices rise, people need lower rents--temporary fluctuations can be managed by curtailing travel (which can't be sustained long-term). So, when the price of gas spiked in 2008, a lot of households couldn't afford their homes. So they stopped paying. Which tanked the value of the mortgage back securities (MBS), which froze the creation of new MBS, which overloaded loan agencies with mortgage they couldn't resell, which froze mortgage lending, which destroyed demand for mortgages, which wrecked demand for homes, even as supply continued to expand. As house construction is a process you can't stop midway, any more than you can stop making an egg, additional housing supply continued to come online. And so housing prices went into freefall for a bit, and we stopped producing more houses entirely. 

By which point, the context had changed. When housing production ceased, with it went the entire institutional apparatus that been making money on the process of converting raw land into homes. In much the same way that the Great Depression wiped out local banks, the Great Recession wiped out local homebuilders, mortgage originators, and financiers. The survivors were much more risk-averse and less speculative (something reinforced by additional lending regulations). And no one was willing to invest in new housing, while there was existing housing out there selling for beneath its production cost. It wasn't until that 'latent supply' cleared that it made sense to produce more housing, and there isn't an increase in the number of 'new starts' until 2012. And, as the chart shows, the gas prices that had made all the peripheral homes reasonable and affordable didn't return until almost 2014. So even if your transport costs had been acceptable in 2008, it wasn't until mid-2014 that the transport/housing cost equilibrium again made those homes attractive to buyers. And even when gas prices fell, there is also the awkward reality of expectations: Expectations about gas prices set between 2005 and 2015 were very different than 1985-2005. 

Further, the demographics of demand had shifted and the "Great Housing Reversal" had begun. An oversupply of single-family detached housing had been predicted for decades, but the oversupply was worse than expected, due to a quirk in Millennial demographics: Less marriage hence and less homeownership. Fewer married couples mean fewer kids, which means living in a rental apartment is more acceptable, for longer, even after marriage. It also meant the people living in apartments were older and hence had higher incomes and were willing/able to pay more in rent. And that has kicked off a generational bonanza in apartment building, aided and abetted by increasingly-political-engaged renters (YIMBY), overcoming the supply restrictions imposed by the homeowner cartels.

Proximity or space

"Cities cannot escape compounding distance costs through better planning or technology. Different urban forms simply create different patterns of who experiences these costs and when. Higher density concentrates opportunity close together, reducing distance costs for those who can afford proximity but often pricing out families seeking space. Lower density offers larger homes and lower housing costs, but imposes compounding daily travel costs on anyone without flexible schedules or the ability to work remotely. Both patterns are rational responses to the same constraint. Both create winners and losers"

Hamish Campbell "Why Distance Compounds Costs in Cities"; Cities + Transport 2026 February 2

This is the nut of the problem with American urbanism: we've still got a transportation policy designed to service families seeking space. They were good policies when they were enacted, when America was undergoing a baby boom and had decades of underbuilding. America was never a nation of single-family households with single earners, commuting by car, but we built a massive amount of housing for the kinds of people who were. But those are no longer the kinds of new households we are getting, and we need to make our transportation system reflect that. People like space, but they'd be willing to pay for proximity, but our legal and regulatory environment prohibits it, and our transportation investment paradigm not only fails to support it but is actively hostile to it. 

The point of transportation investments is to reduce transportation costs. So we need to seriously think about which transportation costs we are trying to reduce, and if those people are actually being served by those investments. And we may find that the people the subsidy is nominally expected to help aren't actually being helped. 

On the flip side, given what Hamish has articulated, it begs the question: "If it's ok to reduce daily travel costs, why is it not ok to lower housing costs?". Any economist will look at you in the eye and tell you that a subsidy is a subsidy, and when you want more of something, you subsidize it--basic economics. So theoretically, there is nothing to stop us from subsiding housing for families who want it. 

DEMOLISHED - The 'Millenials will move to the Suburbs, just like their parents' narrative

Millennial First-Time Homebuyers and Location Choice

Elora Lee Raymond, Jessica Dill, Yongsung Lee

First Published October 25, 2018 Research Article 

https://doi.org/10.1177/0739456X18807751

We research whether Millennial first-time homebuyers are more likely to purchase homes near city centers than Generation X. We use a random sample of individual credit records data to examine first-time mortgaged homebuyers from 2000 to 2016 in the fifty largest US cities. In a logistic regression controlling for age and generation, we estimate separate age and period effects. We also control for car ownership, income, credit score, mortgage size, mortgage payment, and student debt levels. We find that the odds Millennials buy near city centers 21 percent higher than Generation X. This suggests that as Millennials purchase homes, they do not move to the suburbs at the same rate as Generation X.