Abstract
Water scarcity is an increasingly important constraint on housing development in the Western U.S. This study leverages a novel hydrologic-legal measure of unmet water demand, combined with data on new home construction from 1991 to 2020, to examine the impact of water shortages on housing supply. By using fixed effects panel models, we find that moderate levels of water scarcity have limited effects on housing supply, but more severe and persistent shortages lead to large and statistically significant declines in new home construction. The negative effect is especially pronounced in arid states and areas with strict water supply mandates. These findings highlight an important channel through which environmental constraints shape local housing markets.