Soaring House Prices Reflect a Shortage of Homes Rather than a New Housing Bubble

Home prices have soared by 58 percent during the past seven years and now stand 15 percent above boom-time highs. Although this steep rise is reminiscent of last decade’s housing bubble, the root cause is very different and implies a sharply divergent path for the housing market in coming years. The price rise during the housing boom was a symptom of excesses in housing. In contrast, the current price rise signals the need for more construction as the market faces growing shortages. This paper introduces a new housing supply metric to show that the massive overbuilding during the housing boom set in motion an extended period of underbuilding that is still ongoing ten years after the recession ended. The current housing underbuilding explains the recent price rise, and the new metric suggests that construction activity and prices will continue to increase.