Home > Uncategorized > There is Not a Housing Shortage; There is a Home Price Bubble

There is Not a Housing Shortage; There is a Home Price Bubble

June 3, 2021

This is a guest post by Aise O’Neil. Crossposted here.

Homelessness is the greatest moral evil of our time. It is hard to be critical of any economic trends or rhetoric that seems focused in the direction of increasing home construction, given the context of homelessness. However, the increase of housing supply does not have a directly proportional relationship with the population of housed people. 

The rental vacancy rate hit an all time high following the great recession after several boom years for housing construction. At the same time, the boom in housing supply gave way to a boom in foreclosures, leading many empty houses to be held by banks for years. 

In other words, an increase in housing supply may not actually house new people. eIt may just mean more second homes or it may allow more students to move out of their parents’ households. 

So, while the long term effects of more private housing supply would be positive, it will not be nearly as positive as the long term effects of public housing affordable to all people. 

Having said that, the goal of this essay is to demonstrate that a housing price bubble – as well as a temporary boom in home construction – are happening and that their existence is being obfuscated by the home construction industry.

People Say There Is a Housing Shortage, But They Are Wrong:

News stories regarding our nation’s ostensible housing shortage have appeared on CNBC, Yahoo, NASDAQ, Fox Business, Bloomberg, the Washington Post and many other news sites. It certainly would explain the explosive growth in home prices we have been observing recently. According to the Case-Schiller home price index, home prices have grown 13.17% from March 2020 to March 2021.

The argument for a housing shortage seems pretty clear. Covid and the public policy impact of Covid seems to have caused the price of things used to make houses go up. The price of lumber, for instance, has increased dramatically. Similar things have happened to additional building materials. Furthermore there is a belief among many people that our country is in the midst of a labor shortage, which would lead to more expensive labor costs in home construction.

However, I have my own explanation. I say there is a bubble in home prices. 

There are a lot of reasons to believe a bubble may exist. In response to the outbreak of Covid-19 and the subsequent economic downturn, the FED cut interest rates to the lowest overall levels they’ve ever been in American history. According to Freddie Mac, 30-year fixed rate mortgage interest rates hit an all-time low on the week of January 7th, 2021. 

At the same time, the concentration of the outbreak in major cities, civil unrest and the possibility of tax hikes in municipalities facing new fiscal challenges has contributed to the problem of white flight to the suburbs. The consequence of white flight and low borrowing cost has set off a speculative bidding war as home prices grow higher and higher. 

As the two factors started to push up the price of housing, people feel compelled to buy into the market to capture some of the price gains. Hence the price increases in home prices are self-sustaining for now.

While both the housing bubble and the housing shortage arguments are intuitive and seem to feasibly explain the rise in prices (one from a rise in demand the other from a lack of supply), the bubble idea is more supported by the data. 

Here’s why. Both theories would tell us that there would be a frantic market for home purchases, rising prices and low housing inventory as demand for housing exceeds supply (or supply undershoots demand). 

However, the bubble theory tells us that home prices should go up first and that this should increase home production. This increase in home production would then explain rising building material cost. 

The shortage theory, on the other hand, tells us that building material cost and labor cost should go up first. Then, home production should fall as it becomes more expensive. The resulting shortage of new homes on the market would thus explain the rising prices. 

The big difference between these two ideas is that if there is a bubble in housing, we should expect more home production, but if there is a shortage we should expect less.

In fact, home production has gone up and one can see that in the data. New home starts, a measure of home construction graphed below, has continued to grow through the crisis, despite a slight dip at the very beginning:

Real Private Residential Investment, another measure of home construction, has dipped then risen through the pandemic as the graph below shows:

Finally, new home sales are higher during the pandemic than they were before, showing that there is no shortage of new real estate entering the housing market:

Motivation Behind the Shortage Framing

Why are we hearing the wrong explanation for high home prices? The line behind the housing shortage is being intentionally pushed by some industry leaders in home construction. 

For instance, the National Association of Home Builders (NAHB) has a page warning about the “housing affordability crisis,” framing it as a shortage-driven issue. In an interview with NASDAQ, the Chief Economist of the NAHB, claimed the housing shortage could be resolved by getting rid of regulations related to zoning, building safety and employee rights. 

If you work for the NAHB it is your job to advocate for such reforms regardless of the context. 

Furthermore, representatives of the NAHB don’t actually want home prices to fall. Nonetheless, they are go-to interview guests of the financial guests when reporters want an expert to explain why home prices are rising. Most of the economic experts in the housing market work for construction companies or related enterprises and have an agenda.


A lot of high level information you get from the news you read is not the truth so much as a lobby’s version of the truth. The job of the news is not just to provide facts to us but to interpret the fats for us. Unless you’re a powerful corporation or association of small corporations, that interpretation is probably not being done in your own interests.

The housing bubble has increased the population of people for whom homeownership is unaffordable. The people we should worry about are those who cannot even afford homerentership and find themselves out in the cold. Bubbles are one of many pieces of evidence that markets aren’t efficient. They are a good reason to think ending homelessness might be a more important goal than keeping markets free. Housing bubbles are a good reason to think that houses are good to live in, not gamble with.

Categories: Uncategorized
  1. June 3, 2021 at 2:45 pm

    Aise and Cathy, thank you so much for this critical information and for your work in presenting it to us. I knew that the pieces weren’t fitting together, but didn’t understand why. As always, when something doesn’t make sense, look at who stands to gain financially.


  2. Michael Balich
    June 3, 2021 at 2:54 pm

    I disagree a bit. Months of supply is historically low.



  3. June 3, 2021 at 3:03 pm



  4. Russ Helms
    June 3, 2021 at 3:16 pm

    I’ve been reading mathbabe for years and finally, a post where I disagree in large part! Thank you. I read this one with great interest because I love to encounter different opinions and learn new things. I agreed with many things, and I did learn some new things, but I was not convinced by the central thesis.

    Perhaps I’m not knowledgeable enough to disagree directly, but Bill McBride at Calculated Risk might be–and he disagrees at least in part. He’s no NAHB shill–he’s an analyst who was early to correctly call the housing bubble in the ’00s and also the housing bottom afterwards. I’ve been following him since ’05 or so and continue to learn new things. He said in April 2021:

    “Maybe prices are too high based on fundamentals (due to extremely low supply and record low mortgage rates), but there is very little evidence of speculation (not like the loose lending of the housing bubble).”


    More at the link, but a couple of key points stand out to me and provoke questions:
    1) CR’s graphs cover the whole century, including the 00’s bubble. I perceive those paint a different picture than the short-term graphs here. In particular (and from other posts at CR), it appears that housing construction fell so far after the bubble burst in ’08 that it even now it has yet to recover to prior business-cycle peak levels. Shouldn’t that affect supply, and whether the current record-low inventory for sale represents a shortage?
    2) The analysis here doesn’t mention the demographic effects of what I understand to be the largest generation in U.S. history, the Millennials, and their apparently accelerating move from cities to the suburbs. If I understand correctly, that move is not just a pandemic effect, it’s something the several generations that preceded them did, too, though perhaps at a slightly younger age. That seems important. Shouldn’t that demographic effect also affect demand and whether there’s a shortage?

    Thank you for the thought-provoking post!


  5. JV
    June 3, 2021 at 3:29 pm

    Thank you! I’ve been saying this for years. I follow the HUD reports and the past ten+ years, inventory for VACANT housing has been between 15 and 17 million units. It is my belief that any new housing being built will be bought as second and third homes/income property/speculation. FIRE(finance, insurance, real estate) and governments all profit from more building, So they are not going to tell you the truth.

    Liked by 1 person

  6. June 4, 2021 at 11:37 am

    It has been the practice of the Federal government for many years to, in effect, print money and give it to rich people. Since ‘money’ is now actually credit, and since credit is denied to the not-rich, not too much inflation has occurred in the ‘real’ (not-rich-people’s) economy; instead, the new funny money has gone to inflate rich people’s asset prices — stock market, collectibles, luxury goods, credentializing education, politicians and political influence, and so on. The two worlds could get along in parallel as long as the not-rich ate their potatoes in silence. However, there is a cross-over point: real estate. The rich like real estate as an asset, an abstract form of wealth, but even the not-rich have to live somewhere, hence, as rich people’s assets inflate, they drive up not-rich people’s house and rental prices. The not-rich get a little of the funny money through lowered mortgage rates, but that’s about all. As a result, we observe a shortage of, not housing, but affordable housing, and an increase in homelessness. The conditions will continue until the present arrangement is changed or collapses.


  1. June 7, 2021 at 2:12 pm
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