Simply put, the country already has too many houses, the legacy of wide-scale overbuilding during the boom. The Census Bureau says there are two million vacant homes for sale, about double the historical level. Fewer new households, moreover, are being formed as families double up for economic reasons, putting a further brake on demand.
Was there a housing bubble in prices? Was there a housing bubble in construction? One might ask, as Casey Mulligan has (our analysis is indebted to him), whether or not these oft-cited bubbles are really bubbles--the answer is not immediately apparent to Corrections. There does not appear to have been a particularly spectacular housing boom in terms of new housing units or housing completion, judging from the biannual American Housing Survey. The housing bubble is often cited to have started in 1996, when the Case-Shiller Housing Index first began to rise dramatically. However, it appears as though half of the dramatic rise in prices from 1996 has survived the "bubble's" burst--indicating that at least some portion of the bubble was not a bubble at all, but driven by some fundamentals. Housing Units from the American Housing Survey are displayed below, along with the composite Case-Shiller Index, Housing Completions from the Census, and Residential Investment from the Bureau of Economic Analysis's National Economic Accounts (click to enlarge). Housing Units for 2009 is due Summer 2010--the value displayed is imputed from housing completions over a period of 20 years, and some interstitial data points are similarly linearly imputed. An update will be offered when the American Housing Survey for 2009 is released Summer 2010.
As one can see, the stock of housing units never increased dramatically--15% at their peak. The flow of housing completions and residential investment both grew and have fallen from their peak. However, prices have not fallen completely, which indicates to Corrections that the "bubble" was not necessarily a bubble, but simply a housing boom, driven at least in some part by fundamentals--were it not, prices would be even lower than they are now, given an increased housing stock.