Homebuilding contributed to overall economic growth in every previous U.S. economic recovery since 1947, yet contributed next to nothing in the first three years of the recovery from the Great Recession. Home construction had been such a reliable indicator of recovery that its failure to promptly rebound led economists during the early years of the recovery to repeatedly forecast that a housing turnaround was right around the corner. The magnitude of the housing boom in the early 2000s was unprecedented, and its effects on the housing sector lingered for years. As I will show, the slow recovery in homebuilding and the economy was partly a byproduct of the fast increase in house prices and homebuilding in the early 2000s. To explore this dynamic further, I examine some key factors at work in this period: What happened on the supply and demand sides of the housing sector during this past boom and bust cycle?

This article appeared in the Second Quarter 2016 edition of Economic Insights. Download and read the full issue.