Home prices have recovered, but construction remains severely depressed. Why is that?

Let’s take Phoenix, which was the poster child for the 2006 housing bubble. Prices are not back at the peak, but they are well above 2003 levels, even in real terms:

Given the high prices, you might expect housing construction in Phoenix to be highly profitable.  Indeed, just looking at that price data I’d expect construction to be well above 2003 levels, assuming there were no factors depressing supply.  In fact, new construction in Phoenix is roughly half the level of 2003, at least for single-family homes:

Why do I focus on Phoenix? Recall that many articles pointed to Phoenix as the smoking gun behind the 2006 “housing bubble” hypothesis.  It was generally conceded that the price spikes in New York, Boston and California might have partly reflected building restrictions, the so-called NIMBY phenomenon.  But cities such as Phoenix and Las Vegas were seen as having almost unlimited land for development.  The price spike seemed irrational, as it was assumed that the high prices would lead to a surge in new construction, eventually bringing prices down to much lower levels.

But what if supply is also constrained in Phoenix and Las Vegas?  I don’t have any good explanation for what that might be so, but the data strongly suggests that there is some sort of supply problem.  The high prices are back, but construction remains severely depressed.  During the period from 1950 to 2006, the sort of prices we now see in Phoenix and Vegas would have led to a huge surge in housing construction.  For some reason we are not seeing that surge.  Thus the most powerful evidence in favor of a 2006 housing bubble—the anomalous rise in house prices in the inland Southwest—is no longer evidence for the existence of a housing bubble.

I have no idea why supply in these markets is so constrained.  I’ve read articles that make vague references to the cost of land and labor, but no real explanation of why things are so different from 2003.

Kevin Erdmann wrote by far the best account of what really happened during the housing bubble: