National and Regional Housing Patterns

Residential investment is one of the most volatile components of GDP. Coming out of a recession, it is not uncommon for residential investment to jump by more than 20 percent in a year. Going into a recession, it may fall by a similar fraction. Thus, while residential investment accounts for just 4 percent of GDP, it can have a disproportionate influence at critical junctures. Fluctuations in residential investment can have even greater impact at the regional level. A construction and real estate bust contributed to the severe economic problems suffered by Texas in the mid 1980s. At the same time, a real estate boom in New England propelled that region to extraordinary prosperity. The subsequent bust, as in Texas, brought severe hardship. (1) In both cases, a number of other factors contributed: rapid growth in nonresidential as well as residential construction, problems in key export industries, and the regional banking industries' excessive entanglement in construction and real estate. However, residential investment is generally regarded as having played an important role in both areas' roller coaster rides. In the 1990s, residential investment followed a more subdued path. Nationally, the number of housing permits authorized in 1999 was still shy of the levels reached in the mid 1980s. However, in some regions, housing permits had surpassed the highs of the 1980s, increases in home prices had picked up at least by some measures, and anecdotes of "mansionization" or the construction of enormous and enormously expensive homes were numerous. Possibly, regional housing markets in the 1990s may not have been quite as serene as the national numbers indicated. This article compares patterns of residential investment, with a particular emphasis on the similarities and differences between the 1980s and the 1990s in individual regions. Part I briefly examines the national situation. Part II looks at regions. Whereas regional fluctuations in the 1980s varied considerably in magnitude and timing, the regional experience in the 1990s was more uniform and generally consistent with that nationally. On balance, the picture as of 1999 was fairly reassuring. Although the volume of construction in the Mountain states was high, even relative to that area's rapid population growth, no region seemed to possess the vulnerabilities that characterized New England and Texas in the 1980s. Moreover, the increase in the federal funds rate of 175 basis points between June 1999 and