The Upshot's Neil Irwin did a great article yesterday about the extent to which the housing sector is still holding the economy back. He observes, "if building activity returned merely to its postwar average proportion of the economy, growth would jump this year to a booming, 1990s-like level of 4 percent, from today's mediocre 2-plus percent." The chart below, showing residential investment as a share of potential GDP is, I think, the best illustration of today's historically tiny housebuilding sector.
This naturally raises the question of why housing is so depressed. And here I think Irwin, who largely focuses on household formation and aspects of the mortgage market, misses the biggest piece of the story — zoning.
After all, whatever glut of "shadow investory" or foreclosures may exist in Florida or Las Vegas or parts of Arizona, about a quarter of the country lives in either California or the Northeast Corridor and is not exactly enjoying a bounty of cheap housing. The reason residential construction is so depressed nationally is that most of the markets with strong housing demand make it extremely difficult, as a regulatory matter, to add additional housing units.
Not that every area is bad in this regard. Look at the blue line above to see how rapidly the metropolitan area centered on Houston, Texas is adding housing units. Now look at the red line below to see how rapidly — or, rather, slowly — the metro area centered on San Francisco is adding units.
If it's profitable to build this many houses in Houston, it should be profitable to build even more houses in San Francisco — San Francisco is richer, San Francisco has more expensive housing, and San Francisco has better weather. But San Francisco isn't growing as fast as Houston. It's not even close. That's the power of regulation. Not just in the city, but in the surrounding suburbs. Not just in the Bay Area but in liberal metro areas on both coasts.
Here's Greater Atlanta vs Greater Boston:
Again people in Boston are considerably richer, on average, than people in Atlanta. And housing costs in the Boston area are considerably higher than housing costs in the Atlanta area. So there should be more construction in Boston than in Atlanta. But instead there's less. And once again this is because of regulatory barriers to new construction.
A significant swath of America is facing a housing affordability crisis, and simultaneously the country is facing a massive economic slump largely driven by a depressed level of housing construction. Opening up the spigots of development in high-priced, high-demand areas could considerably reducing housing affordability problems and create a ton of new jobs in the construction sector and related fields. But most the areas of the country where housing demand is strongest are generally the areas most politically dominated by left-wing people who are reluctant to embrace a deregulatory agenda.