Deflating the housing bubble – an update

Summary:  Since the first post here about the housing crisis in December 2007, it’s been described here as not just a central piece of the economic weakness but a illustration of our political dysfunctionality — our inability to use a crisis to identify structural weaknesses and generate the pressure for their reform. Here’s an update about the core element of the problem: the excess supply of housing built during the bubble.




  1. All those empty homes
  2. Absorbing the excess homes
  3. Demographic headwinds
  4. Leave a comment
  5. For More Information


(1)  All those empty homes

The Federal government has applied a fantastic array of programs to stimulate housing demand. A tax credit for first-time home buyers. Rates have been forced down to absurd levels. The Federal Reserve has purchased almost a trillion dollars of mortgage-backed securities. The Housing Finance Agency has become the nation’s largest subprime lender. And the Federal government in some form backs aprox 90% of all new mortgages (source here).

As a result some of the excess housing stock has been worked off during the past four years — used or destroyed. Today’s Census Housing Vacancy Survey for Q4 of 2012 shows us how far we’ve come. And how much remains.

Percent of housing units vacant (looking at Q4 numbers)

  • Trough: 10.7% in 1993
  • Average 1987 – 2006: 11.5%
  • Peak: 14.5% in 2008 &  2009
  • 2012: 13.5%

The vacancy rate peaked at aprox 3% above the long-term average, and after four years is still 2% above the average. When vacancies drop below the average then prices rise and construction booms — in a free-market economy.


The still-high vacancy rate is broadly distributed among sub-categories. The “held off-market” segment is 39% of total vacancies, roughly the long-term average. So the vacancy rate is probably not dominated by banks holding foreclosed properties.

(2)  Absorbing the excess

In areas with out-migration the ultimate fate of excess units is destruction. While that happens housing construction continues in areas with net in-migration.  The result is a slower rate of growth in the nation’s housing stock, allowing the growing number of households to absorb excess housing units. That appears to be happening, although slowly.


Average annual growth in the number of housing units:

  • past 30 years: 1.5%
  • past 20 years: 1.1%
  • past 10 years: 1.1%
  • past 4 years (since the bust): 0.4%
  • 2012: 0.4%

(3)  Demographic headwinds for housing

Analysts tend to look at units, but size (ie, area) is an important factor in home values. As the boomers age, they will want less space (especially since home equity is the largest pool of wealth for boomers). Large homes are sold for small homes.  Small homes for condos in a retirement community.  Condos for an apartment in an assisted living facility. And eventually, the final move to a nursing home.

This evolution will put pressure on home prices for several decades. What the boomers buy rises in price; what they sell drops in price.

(4)  Leave a comment

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(5)  For More Information

(a)  Other posts about the housing bubble

  1. Diagnosing the eagle, chapter I — the housing bust, 6 December 2007
  2. “Idiots Fiddle While Rome Burns” – comforting and facile rhetoric, 24 July 2008
  3. A vital but widely misunderstood aspect of our financial crisis, 18 September 2008 — Too many homes.
  4. Knocking down houses in order to save the village, 20 October 2008
  5. Destroying houses in order to boost home prices, 16 December 2008
  6. The housing crisis allows America to look in the mirror. What do we see?, 9 March 2009
  7. Another step to solving the housing crisis: downsize cities by destroying neighborhoods, 2 April 2009
  8. Cutting through the fog to clearly understand the housing crisis, 8 July 2010
  9. Housing Update – dynamite to blast us out of our lethargy?, 27 July 2010

(b)  Posts about the mortgage crisis:

  1. A must-read for every American citizen: “The Fannie Mae Gang”, 25 July 2008
  2. Sparks of justice still live in America – cherish them and perhaps they’ll spread, 11 September 2009 — About foreclosures.
  3. Who should we blame for the mortgage crisis?, 16 January 2010
  4. Here’s an opportunity for the Tea Party: fighting foreclosure fraud by banks!, 22 September 2010
  5. A briefing about the foreclosure fraud crisis: its origin and impacts, 14 October 2010
  6. Who should we blame for the mortgage crisis?, 16 January 2011 — An assortment of evidence about the cause of the mortgage crisis.
  7. Who caused the housing crisis?  Why do people not believe all the studies?, 15 November 2011
  8. More use of the big lie: shifting the blame for the housing crisis, 29 December 2011



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