Sunday, October 08, 2006

Housing: Estimate of Recent Overbuilding

by Bill McBride on 10/08/2006 07:44:00 PM

Fed Vice Chairman Donald L. Kohn said this week:

"... any overbuilding in 2004 and 2005 was small enough to be worked off over coming quarters at close to the current level of housing starts."
Here are a couple of estimate of the amount of overbuilding in recent years:

Click on graph for larger image.

This graph is based on estimates from the Brookings Institution: Toward a new Metropolis: The opportunity to rebuild America (hat tip: JLA)

Blue is the estimate of new housing units needed per year from Brookings. This includes new household formation and replacing existing stock (due to demolitions, etc.) Red is the actual number of housing units added to inventory in recent years. The cumulative excess is 1.42 million housing units through 2005.

There is additional overbuilding in 2006 that is not included.

Another approach, to estimate the amount of overbuilding, would be to use the Census Bureau data on the housing inventory and vacancy rates. If vacancy rates fell back to 2000 levels that would mean there are 1.1 million excess units. Add to this the current excess New Home inventory and any second homes that are being held as investments, and the number would be close to the 1.4 million estimate using the Brookings data.

In the next post, I will look at the impact of this overbuilding on starts and New Home sales.