3 Worst 5-Year Periods for Housing Starts from 1959 to 2000:
Sept. 1965 - Aug. 1970: 1,365,000
Jan. 1979 - Dec. 1983: 1,375,000
Mar. 1989 - Feb. 1994: 1,210,000
Average Annual Housing Starts, Sept. 2000-Aug. 2015 - a 15 year period which includes the housing "bubble":
So, the worst 5 year period for housing starts in the modern era was followed by a 6 year period with average housing starts (1,517,000 from 1994 to 2000). This was followed by a 15 year period that has had lower housing starts than any of the other 5 year periods in the modern era.
Yet, practically everyone I speak to says home prices and rents are going up because we have a too much money!
Apparently, there is nothing too outrageous for there to be a national consensus about it. There are arguments about efficient markets, which have not been settled. But, is there any question about what would happen if we had stable regulatory and institutional foundations that weren't bent on adjusting market conditions? We'd be building houses! And all the people complaining about demand and bubbles would be buying them. Because we are only insane in the abstract. We are usually sane in practice.
The problem isn't market efficiency. The problem is that consensus leads to policy, and policy has a real effect on the market. We can argue about whether, on a scale of 1 to 10, market efficiency is a 7 or a 9. But, public policy can go off the rails. It is capable to getting pinned down at 1.
Group beliefs are strange. They say you can't reason someone out of something they weren't reasoned into. But, we all think we were reasoned into our beliefs. When consensus beliefs reach a certain level of absurdity, strange group behaviors begin to take shape. There is some tipping point, where the absurdity of the belief itself creates a barrier against accepting rational, disciplining information, because it becomes difficult for the group to correct in a face-saving way. We naturally rationalize the delusion. We are now engaged in a subconscious national Ptolemaic drama. The problem is that this process is unpredictable because it is not constrained by reason.
This particular issue is not even moderated by arbitrary bipartisanship, because the absurdity has captured virtually the entire spectrum of political viewpoints. Antipathy to finance is a useful unifying device. But, the worse things get, the harder the face-saving becomes. I don't have a confident image of how the American populace will be able to allow housing to normalize. The mechanisms that trigger new housing will probably lead to recovering prices before they lead to a supply response that will be strong enough to eventually lower rents, and therefore eventually prices. Can we get there?