Kasriel: How does an excess supply get remedied?

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This post is a guest contribution by Paul Kasriel* of The Northern Trust Company.

How does an excess supply get remedied? By allowing prices to fall and by cutting production. This remedy applies to everything from hogs to houses. It is well documented that the prices of houses have plummeted. What may be less well known is that newly-started production of single-family homes has come back into equilibrium with the sales of new single-family homes – at least through April. Chart 1 documents that starts of single-family homes ran at a seasonally-adjusted annual rate of 368,000 in April, a touch above sales of new single-family homes at a seasonally-adjusted annual rate of 352,000.

Chart 2 shows that in recent months the ratio of single-family house starts to sales of new single family home sales is at it lowest level in 47 years. This is not to gloss over the fact that there still is a large supply overhang of new homes for sale that either have been completed or are under construction (see Chart 3).

But again, markets work. The housing market is moving toward a new equilibrium with production being curtailed and prices falling.

housing-starts-pic1

single-family-house-pic2

new-family-houses-pic3

Source: Paul Kasriel, Northern Trust – Daily Global Commentary, June 15, 2009.

*Paul Kasriel is Senior Vice President and Director of Economic Research at The Northern Trust Company. The accuracy of the Economic Research Department’s forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul’s 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst.

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1 comment to Kasriel: How does an excess supply get remedied?

  • Russ Trimble

    How can the ratio of starts to sales stay so far above 1 for 50 years. Where did the surplus new houses go?

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