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.

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

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Andrew Korz, CFA

Executive Director, Investment Research

Lara Rhame

Chief U.S. Economist + Managing Director

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