The overbuilding problem is going to be behind us early next year, Edward Leamer suggests:
High rates of homebuilding from 2004 to 2006 gave us about a million more single-family homes than suggested by historical rates of building, illustrated to the right. Since 2006, plummeting rates of building have reduced that home overhang to about 400 thousand units, and we should be back on trend in the stock of homes very early in 2009.
A rough calculation of the remaining excess in home prices can be made by extending the 1975-2002 inflation-adjusted trend in the OFHEO home price index to 2008q2 and comparing that with the actual index. That suggests a remaining overvaluation of 24%. Using the 2008q2 rate of decline in home prices, -5%, and the inflation rate of 2%, it will take a little less than three years for home prices to get back to trend. It seems likely going forward that the inflation rate will be higher and the rate of home price decline greater. It is also the case that some of the excess is a consequence of the low rate of interest. Still it doesn’t seem reasonable to expect this pricing problem to be solved nationwide before the end of 2009 at the earliest when home prices are likely to be down another 10% at least.
The data thus suggest that the overbuilding problem is going to be behind us early next year, when the stock of single-family homes will be back to normal, but the price declines for new and existing homes are likely to go on for at least another year or two.