by Calculated Risk on 8/16/2012 11:22:00 AM

From Nick Timiraos at the WSJ: Shadow Inventory: How Low New Construction Helps the Outlook

There’s been a lot of attention over the last few years on the “shadow inventory” of potential foreclosures — a pent-up supply of homes that could smother an incipient housing recovery.

But there’s been comparatively less attention on the lack of new housing construction, which has helped to offset the potential damage from elevated levels of foreclosed properties. New home building has been at its lowest levels since World War II in 2009, 2010, and 2011.

The record low level of completions over the last four years - and record low level of housing units added to the housing stock - is an important reason for the budding recovery in housing. See: Housing: Record Low Total Completions in 2011. The last four years have seen record low completions, and 2012 will also be very low. This low level of completions means that a significant portion of the excess vacant housing supply has been absorbed. And completions in 2012 will still be very low even with the 20%+ increase in housing starts.

From Timiraos:

“Not too many people talk about the lack of new construction over the last several years, which has set the foundation for a snapback in pricing,” says Michael Sklarz, president of real-estate research firm Collateral Analytics.

Frank Nothaft, the chief economist at Freddie Mac, elaborated on this point in a research note published last week ... “the relatively small amount of new construction, coupled with increased household formation, has allowed much of the excess vacant inventory to be absorbed over the past few years,” he wrote.

Nothaft is using the Housing Vacancies and Homeownership (HVS) and that survey is not consistent with other measures (like the decennial Census and the ACS). The Census Bureau is looking into the differences between the surveys, but I'm not confident in using the HVS to estimate the excess vacant supply.

However I do agree with Nothaft that "much of the excess vacant" has been absorbed.