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The race for space: analyzing the red-hot housing market

With home price growth at its highest level since 2004, we break down key supply and demand drivers and look ahead to what’s next.

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August 2, 2021

The U.S. housing market has boomed since the onset of the pandemic in spring 2020, with consumers in search of more space and home price growth rising sharply. The market has been an apt microcosm for the COVID economy as an unlikely surge in demand combined with supply challenges has created a red-hot market. As the most acute impacts of the pandemic recede, the direction of the housing market from here is one of the most pivotal macro questions facing the U.S. economy.

Supply and demand factors have driven home price appreciation to nearly 17% year over-year.1 We find that pandemic shock factors and secular elements have combined to create a perfect storm for home prices. Despite the rapid price growth, there are fundamental differences between this market and the one that became a bubble in the mid-2000s. Nearly 18 months into the pandemic, there are early signs that the market is moving toward a more balanced posture: new construction is picking up, and there is evidence that sky-high prices are both incentivizing sellers to list their homes and giving potential buyers pause. However, the secular factors of low interest rates, demographics and a newfound pandemic-driven appreciation of space are powerful and should provide a continuing tailwind for housing. The housing market is also front and center in one of the most consequential macro debates: the permanence of new trends in remote work and migration away from major metro areas and toward tertiary markets.

U.S national home price appreciation (% year-over-year)

Source: S&P Case/Shiller, FHFA, as of May 31, 2021.

Key Takeaways

  • Home price growth has reached its highest level since 2004.
  • A perfect storm of supply and demand factors, both secular and pandemic-driven, has resulted in the red-hot market.
  • There are fundamental differences between the current environment and the pre-GFC housing bubble, from affordability to leverage levels.
  • The durability and prevalence of remote work will be crucial in determining whether relocation buyers can continue to power the market.
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  • S&P Case/Shiller, FHFA, as of May 31, 2021.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

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Andrew Korz, CFA

Executive Director, Investment Research
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Lara Rhame

Chief U.S. Economist + Managing Director
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