Residential construction lags across the US and their implications for housing supply

Housing supply decisions consist of both an extensive margin (new housing starts) and an intensive margin (construction intensity of incomplete houses). While it is well known that housing starts have declined dramatically during the 2006--2009 housing bust, the intensive margin of residential investment has not been studied in the literature. In this paper, we document that construction intensity of incomplete houses has also fallen significantly during the bust. Using the Census micro data for construction lags of single-family houses across the US, we show that average construction lags for completed houses increased during the bust, and that this increase comes from long deferrals of several houses under construction, especially those that were unsold at the early stage of construction. Motivated by these new facts, we study a time-to-build model of residential construction where investment in each stage is irreversible. The model predicts that as the level of uncertainty increases, the ``wait-and-see'' channel becomes relatively more important for the intensive margin than for housing starts. Calibrated to match the house price dynamics during the recent recession, the model accounts for the majority of the observed increase in construction lags, which suggests that the real-options mechanism played an important role in the dynamics of residential investment during the recent bust. Several housing supply implications based on the model follow.