Thursday, August 3, 2017

Housing: Part 248 - No, Phoenix didn't build too many homes.

Just a quick post so I can stick this graph here.

The one thing everyone in Phoenix knows is that we built too many homes during the bubble and that is what caused the bust.

Here is an article that claims (HT: John Wake) that, based on stable demand for 35,000 homes per year, Phoenix built 75,000 too many homes, and that was what killed the housing market here.

Here is a graph, from IRS data, of domestic migration into Phoenix, based on the number of households.  There was a massive inflow of new residents fleeing the high priced California cities.  In a normal year, net inflows into Phoenix were about 20,000 - claiming more than half of that stable demand for new housing units.  In 2004 and 2005, that shot up to more than 30,000 per year.  Then, we killed the housing market, and that flow was destroyed.  By 2008, and continuing for years, net inflows have been negligible.  (This graph stops in 2010, but migration into cities like Phoenix has continued to be stifled.)

Source: IRS - number of households filing tax returns

The supposed overbuilding was actually a response to real demand for housing.  And, when that demand collapsed, because migration collapsed, it was a double whammy.  Builders were, of course, building for that high demand.  What were they supposed to do? And, when it suddenly collapsed, it looked like they had built 75,000 too many homes.

The only reason Phoenix had a price bubble is because it couldn't meet this huge boost in demand, so the short term supply inelasticity caused prices to rise.  We can see that in this graph.  By 2005, outmigration was rising in Phoenix, because Phoenix couldn't build enough houses, and so the same migration patterns that were coming out of California started to develop in Phoenix.  People were moving away to escape rising costs.

The frustrating thing is that, during that time, builders were holding lotteries to sell newly permitted newbuilds.  That is insane.  I don't understand how that could have happened.  And, I can't get a straight answer from anybody about why.  When I ask people, they say, "Well, there were all these speculators coming in and buying up houses.  We had to limit new building because they were creating a bubble in supply."  NO!  The bubble was in prices because we were holding lotteries to sell houses.  If you're a speculator, and you see a market where the sellers say, "We are limiting the quantity that we are selling.  If you don't get chosen as a buyer this month, come back next month, where we will release some more limited supply that is guaranteed to sell at a higher price." that is a speculator's dream!  And, when I ask why we were doing that, the response I get is that we didn't want to build a bunch of houses for speculators!

Meanwhile, the migration statistics say that by the end of the bubble, 10,000 extra households were leaving town each year - for want of a house!

Contagion cities like Phoenix have been devastated by the housing bust.  Incomes compared to other cities have collapsed.  We should be outraged.  We should be marching in the streets against tight credit markets.  Instead, the consensus in Phoenix seems to be just as screwed up as it is everywhere else.  Self-flagellation.  Our greed angered the real estate gods, and this is our just due.

The only thing we did wrong was not building enough houses.


  1. I continue to be confused why you think credit is tight. I could get financing right now to build 5 spec homes...piece of cake. I just think it's a poor return on capital.

    1. Credit is objectively tight at the public agencies. Mortgage issuance is more sensitive to income, FICO scores, etc. than it ever has been in modern US housing markets. And, Price/Rent levels are extremely low in low tier markets, especially given low real long term interest rates.

      This isn't questionable. The signals are extreme.


    Alex T gets closer….still no cigar

    1. I love it. The Overton Window is sliding right up to me.

  3. Here is one orthodox macroeconomists will ignore:

    The world’s freest economy (as ranked by Heritage Foundation)?

    Hong Kong!

    A place where two-thirds of median family income is absorbed by mortgage payments and which has the world’s least affordable housing?

    Hong Kong!

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