A new study looks at how the Great Recession, construction employment, and housing supply levels are linked.
The Great Recession occurred 17 years ago, from December 2007 to June 2009. Led by a crash in the housing sector, it was the deepest recession since World War II and resulted in noteworthy financial industry failures, serious economic contraction, and a significant rise in unemployment.
Recovery was historically slow, and some sectors never recovered their pre-recession vigor.
Residential housing, for example, is an industry that is still not fully recovered, almost two decades later. Construction sector employment and housing supply remain persistently below their pre-2008 levels. Thao Le, assistant professor at Georgia State University’s Robinson College of Business, wanted to find out why.
What she found was a direct connection between the economic downturn, construction labor supply, and housing construction.
So, if you want to know why home sales are down, home prices are up, and younger generations are delaying or abandoning the dream of home ownership, Le’s research offers an explanation.
A recent analysis by Zillow estimates that the U.S. is 4.5 million houses short in terms of what’s for sale or rent.
“I was struck by the housing shortage, and wondering why we don’t just build more,” says Le.
“There are many factors contributing to the shortage, but as I looked into it, it was clear that skilled construction labor was—and is—far below what it had been before 2008. I wondered about this persistent labor shortage, its cause, and its impact.”
Le’s research posed two questions:
- Did the Great Recession induce a long-lasting negative impact on employment in the construction sector, especially in housing construction?
- If so, did the reduction in construction workforce caused by the Great Recession play a role in the persistently low housing supply seen in the past decade?
Spoiler alert: yes and yes.
To test the impact of the recession on construction employment, Le considered the recession’s severity in different areas of the country from 2010 through 2019. (The 2019 end date removed economic impacts and anomalies due to the COVID pandemic.) She examined how construction employment and home building in areas with larger declines in house prices recovered relative to areas with less severe price decreases.
Unsurprisingly, areas where housing prices were more severely affected by the recession suffered more drastic construction job losses than those suffering only mild downturns. Le found that a 1% decrease in house prices in 2009 was associated with a 1.7%-2% reduction in construction employment in 2019. In real numbers, construction employment dropped 30% from its peak in 2005, and was up to only 88% of pre-recession levels by 2019.
In terms of housing supply, Le looked at numbers of building permits to measure home-building activity over the same period, noting that the number of housing permits dropped 74% from its peak in 2005. By 2019, housing permits were back up by only by 57%.
Is this a wage issue? No. Le found that construction labor wages grew in hard-hit areas more than general wages, and those areas also experienced steeper increases in house prices, pointing to more housing demand than supply in those areas.
Is this a shift in housing demand? No. The recovery of residential construction firms has been similar across all areas—those that suffered greater and lesser declines—indicating that there is no difference in demand in these areas.
Together, all of these factors point to a skilled labor shortage contributing to lower housing construction rates: Lack of skilled construction labor —> less residential construction —> less available housing inventory —> excess demand —> higher house prices.
It’s a causal relationship. Le’s estimates suggest that a 10% decrease in house prices during 2007-2009 caused a 17%-20% decrease in construction employment and a 3%-7% decrease in construction in 2019.
While she is careful to point out that housing construction employment is only one explanation for the relationship between the recession and sluggish building, “It is a significant contributor,” Le explains. “I estimate that it accounts for 20% to 40% of the decline in building permits resulting from the crisis.”
Le’s research was the first to uncover how this contraction in residential construction labor led to a reduction housing production for over a decade, thereby worsening housing affordability.
“My research highlights the need for region-specific policies aimed at addressing labor shortages in construction,” Le says.
“This is particularly true in areas hard-hit by downturns, to improve housing affordability. Programs to enhance training and attract skilled workers to the construction industry are essential for increasing housing supply and benefitting the wider housing market.”
The study appears in the journal Real Estate Economics.
Source: Georgia State University
The post What’s behind high housing prices? appeared first on Futurity.
from Futurity https://ift.tt/9aleJod