Making Sense of the U.S. Housing Slowdown

Economic Letter—Insights from the Federal Reserve Bank of Dallas
Vol. 1, No. 11
November 2006
Federal Reserve Bank of Dallas

Making Sense of the U.S. Housing Slowdown
by John V. Duca
A robust housing market buoyed the U.S. economy during the 2001 recession and fueled growth once recovery began. The record-setting building of single-family homes created construction jobs and spurred demand for building materials, appliances and home furnishings. Business was brisk for mortgage lenders and real estate brokers alike.

Perhaps even more significant, rapidly rising housing prices had allowed consumers to tap into their mounting home equity, providing them the financial wherewithal for a buying spree. By mid-2004, however, home prices had risen to the point where many analysts worried that markets were overheated, making homes less affordable, particularly for first-time buyers already facing the drag of rising energy prices.

Today, signs of a housing market slowdown are unmistakable. New and existing home sales have been declining since mid-2005, although they remain high by historical standards (Chart 1A). Building activity has begun to cool a bit, while single-family housing permits have fallen 34 percent from their peak, settling back to pre-2002 levels (Chart 1B). The building permits data suggest further declines in single-family construction are likely, given the usual six to eight months it takes to complete a home.

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