Hi! I’m Aziz. My newsletter contextualizes economic news using data visualization. These days I’m focusing on housing—hit reply and let me know what you think.

The most common measure of new construction is “home starts”. These had been declining from early 2022 until this past April. But in the latest data, representing May, there were over 1.6 million starts—a sharp jump from the prior month. For a subset of housing—buildings with 5 or more units—the recent pace of construction is the highest in almost forty years.

In theory, construction boosts supply and should lead to more affordable homes. But the data suggests otherwise: over the past 50 years, a flip from declining to rising construction presages rising—not falling—prices.

The a priori relationship between new construction and prices is unclear.

On the one hand, construction boosts supply, and should lead to lower prices. On the other hand, when homebuilders break ground on a rising number of projects, they are responding to demand. Higher demand comes with higher prices.

So what is the relationship, on balance, between construction and prices? This is a question that can only be explained empirically.

The above chart identifies episodes of falling nominal and real (inflation-adjusted) prices, measured by the Case-Shiller index. These are the solid and cross-hatched yellow boxes. The chart overlays these periods of falling prices with hollow black boxes that indicate instances of declining construction, measured by home starts.

More construction occurs ahead of higher prices

As I’ve highlighted before, the conventional way of talking about home prices is in nominal terms (i.e., unadjusted for inflation), and by this measure, declines in prices are exceedingly rare (only two instances in the past fifty years). But home prices frequently decline in real terms.

Periods of declining construction and falling prices (at least, in real terms) have overlapped. And, in terms of timing, prices tend to fall before construction cools. This makes sense, since it takes time for homebuilding companies to adjust to the falling demand, or oversupply, signaled by falling prices.

Conversely, construction tends to inflect from declining to increasing—as it did in the last reading—some time before prices start rising. The lead-time from higher starts to higher prices is long and variable: at the end of the credit crisis, starts began to rise a year before prices. In the late 80s they rebounded at the same time.

Rising construction seems like a necessary but not sufficient condition for rising prices.

Separating supply and demand

This is not to say building more homes doesn’t increase affordability—plenty of studies show it does, as the theory would predict, especially for rental housing. The data merely shows that, because construction occurs at times of rising demand, this supply effect is overshadowed by the demand effect, and tends to foreshadow rising prices, albeit with highly variable timing.

Further reading

Waiting for Home Prices to Fall? Don't Hold Your Breath May 30 Read full story