One of the primary reasons the labor market remains weak is that construction activity is relatively low, resulting in a reduced demand for construction workers. My friends in the building industry argue that because housing starts are at historic lows, we are actually not building enough housing. While I’m open to that as a possibility, and believe it to be the case in select markets, nationally the evidence suggests otherwise.
First of all, the monthly supply of new homes — that is the time that would be required to sell off the current inventory — is still relatively high at just under seven months, as shown in the following figure. Granted this is significantly below the 12 month peak we saw at the beginning of 2009. So without a doubt this number is moving in the right direction, but it still has a little ways to go. I will be far more optmistic about the housing market when we get to around five months’ new supply.