Safehaven | How Does an Excess Supply Get Remedied?

June 15, 2009

How Does an Excess Supply Get Remedied?
by Paul Kasriel

By allowing prices to fall and by cutting production. This remedy applies to everything from hods to houses. It is well documented that the prices of houses have plummeted. What may be less well known is that newly-started production of single-family homes has come back into equilibrium with the sales of new single-family homes - at least through April. Chart 1 documents that starts of single-family homes ran at a seasonally-adjusted annual rate of 368,000 in April, a touch above sales of new single-family homes at a seasonally-adjusted annual rate of 352,000. Chart 2 shows that in recent months the ratio of single-family house starts to sales of new single family home sales is at it lowest level in 47 years. This is not to gloss over the fact that there still is a large supply overhang of new homes for sale that either have been completed or are under construction (see Chart 3). But again, markets work. The housing market is moving toward a new equilibrium with production being curtailed and prices falling.

Chart 1

Chart 2

Chart 3

Paul L. Kasriel, Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
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The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.