We explore the role of foreclosure inventories in a model of housing supply. The foreclosure variable is necessary to account for the steep and sustained drop in new construction activity following the U.S. housing market bust beginning in 2006. There is modest evidence that local banking conditions play a role in determining housing starts. Even with state-level foreclosures and banking variables in the model, there is a sizeable post-2006 residual common to all states. We argue that, in addition to observable macro and local factors, housing starts in the Great Recession have been weighed down in part by aggregate uncertainty factors
About the Authors
John Krainer, Board of Governors of the Federal Reserve System