The Long-run Demand for Housing,the Housing Glut,and the Implications for the Financial Crisis

I estimate the long-run demand for housing to be, at most, 1.6 million units per year. This compares to housing starts of two million in 2004 and again in 2005. This overbuilding is the primary cause of the current housing glut, which I estimate to be between 1.24 and 1.72 million units. It will thus take several years for the excess vacant units to be fully absorbed. This housing glut needs to be quantified because it is the primary cause of the downward spiral in housing prices. I argue that overbuilding aggravates economic instability considerably. I suggest that Federal Reserve forecasters develop estimates of the long-run demand for housing, and that these be considered in implementing monetary policy.