Determinants of Housing Supply Expansion in the Western United States

New residential construction is an important indicator of economic health. Previous empirical work demonstrates the profound power of housing starts in forecasting recession. Theoretical research, backed by empirical study, suggests that home prices and interest rates are closely related to the amount of residential investment. This paper attempts to better understand the complex relationship between various factors that influence the supply and demand of new housing; what information do suppliers and regulators use to determine how many new units of housing will be constructed? Specifically, we will look at the respective state housing markets of California, Oregon, and Washington by constructing an empirical model of the number of housing permits issued. Our findings suggest that during the period from 2005 to 2019, the number of annual housing permits issued, as a proxy for housing starts, is related negatively to increases in, and higher levels of, 30-year mortgage rates and positively to increases in, and higher levels of, 2-year Treasury bill rates. Short-term interest rates may have been a special signalling mechanism for the health of the overall economy