The Right Stimulus Package

In the United States we have built too many houses in the last five years. The culprit here, in part, is a group of big public corporations like Lennar and Toll Brothers, with plenty of access to capital. Mom and pop construction companies would have had the capacity to slow down when demand tapered off after 2005 or so. But public companies need to keep up their sales in order to keep their stock price up.

The first couple years of the millennium were great for them, because demand for new houses was very strong. There was a notion afoot at the time that a single family residence was a great place to park your money. And if a $500,000 home was a good investment, why not build a million dollar one? Farms and other undeveloped properties two hours outside of major cities were subdivided a fresh batch of 3000 square foot colonials was harvested. The boom lasted longer than expected, and when demand for new houses started to peter the construction boom was sustained by the pernicious financing experiments we've heard so much about. Prices weren't going up anymore but houses were still getting built and the developers had to find a way to sell them. Why not partner up with mortgage providers and work out some way to get somebody's name on the deed. The mortgage banks needed to keep things moving too. Credit standards came down, and the houses got sold.

The economic consequences of this run-amok home construction are manifold. One direct victim is the new home construction industry, which is clearly in a deep recession. An indirect consequence of the excessive construction is a declining price for existing homes. A plethora of empty houses and uncertainty about the direction of prices make this an awful time to sell any house. When people can't sell things they want to sell, a lot of potential transactions are unconsummated. Geographically wider metro areas make for more traffic and longer commutes. Oh and by the way our transportaion "system" is emitting increasing amounts of carbon dioxide into the atmosphere and warming the earth.

Can the government do anything to help the market for existing homes? It can and it should. Home prices could be supported by taking some developable land off the table. The numbers are not easy, but I think you could make a difference by pouring fifty billion dollars into state land conservation programs, using matching grants, and letting the states aggressively acquire land around overbuilt metro areas, in an effort to concentrate development. The "downside" here is that new home construction will not be helped by less land and higher land prices. But the downside is an upside in my view: sprawl is terrible for the environment! New home construction on the outskirts of huge metro areas like Phoenix is a terrible idea, and public policy should discourage not encourage it. Conserving land will put dollars in the wallets of owners of existing homes and believe me, they could use a hand, as could our planet.