A quick look at the house price index (either the Case Shiller index or the U.S. Federal Housing Agency index) might worry us. After all this is what the graph looks like from 2000 to now:
Sounds like house prices are back to their 2005 level, right? Except that much of the increase is driven by nominal, not real increases. Deflating house prices by the Consumer Price Index reveals a slightly different graph.
In real (rather than nominal) house prices have only slightly climbed above their 2002 levels. That’s a much smaller increase, but still reveals that there is an imbalance in the demand and supply of housing units. Housing starts are more than 35% below the 1500 level.
There is a tight connection between population and housing demand. The construction of new homes is not keeping up with the demand pressure. What’s new in 2015 is that the supply of new homes is not keeping up with demand. As the graph below suggests, since 2007 we seem to have entered an area of low construction.
One interesting thing: there is a large increase in the construction of new multi-unit structures. A look at construction starts for 5-Unit Structures or More reveals a much different pattern; the U.S. construction industry is back at building dense, urban dwellings.