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Residential Housing: Boom or Bubble?

March 12, 2021

Are trends in the residential housing market signaling another bubble? Catch our newest TrendsTalk episode with ITR Senior Forecaster Connor Lokar to learn more.



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Transcript by Rev

Hello, everyone. Thanks for checking back in for another Trends Talk. I'm Connor Lokar, senior forecaster at ITR, and today's talk is inspired by a question from an audience member at my most recent webinar. I was out to a group on the West coast and his question stemmed from the booming growth conditions that we're seeing in the single-family development and home improvement markets. The crux of his concern was, is this a boom or is this a bubble that he needs to watch out for in the next couple of years? I think the short answer is no. ITR does not think that this is a bubble. We do think that this is a boom and we think it's well-founded. We think there's a number of fundamental support in the current rise in the single-family and remodeling markets.

Now, that's not to say ... This isn't an inappropriate question to ask, especially given the likely mental scars that exist for anyone in the residential industry that had to survive the housing crisis just over a decade ago. So, I certainly don't blame the question, but housing and remodeling was a pleasant surprise last year as it stumbled for all of maybe six weeks in the early onset of COVID-19 and the pandemic shutdowns last year in late March and in the month of April. But, ultimately, that stumble was short-lived as the industry roared back to life, made the most of the Summer months, even posted some all-time high metrics. The starts increase from May to June, for example, was the best ever for a dataset that obviously goes back decades. So, this surge was really derived from a number of factors, all of which are highly favorable for the industry.

To start with the early financial market calamity that hit around this time last year early on in the pandemic, we saw distress in the stock market, which also led to a surge in bond demand which cratered ten-year treasury yields, and with that, pulled down mortgage rates, which typically track long-term interest rate trends, notably the ten-year treasury yield. We saw that US conventional 30-year fixed mortgages averaged below 3%. How crazy is that? Below 3% from April 2020 through the remainder of the year. And that's a great trend that home buyers took advantage of. Next, inventories. Heading into the crisis, we're already low. Single-unit housing starts and construction actually had a pretty lackluster 2019, finishing the year 0.8% below 2018, and early last year, the first quarter of 2020, it was just in the process of ramping up when the COVID-19 Pandemic hit, and this put inventories well behind demand for the remainder of the year as buyers started jumping at low mortgage rates faster than builders could keep up after losing some key weeks early in the building season.

So, inventory levels now are actually still declining into early 2021. Through January, US existing home inventory nationally sat at 1.04 million units. That's the lowest level in the 21st century, and at least, since the 1990s. And the last thing, and I think most significantly, was the call it COVID factors. When we look at the geographic mobility offered to folks by remote working accommodations or other societal changes during the year, millions of Americans suddenly found themselves no longer tightly tethered to the geographic proximity of their physical office locations with remote working accommodations as a result of COVID-19. We refer to this anecdotally all over, and I'm sure a number of you personally experienced this, and we're seeing that play out within the residential market. Single-family trends are thriving while multi-family rental trends are struggling. We look at urban living, city living typically skews a bit more so towards rental markets.

So, the trends we're seeing indicates a bit of geographic displacement of demand out of perhaps rental demand into single-family market demand during the last year and still ongoing here in 2021. Then, that ignores the fact that folks that already own homes and maybe weren't necessarily looking to move, spending hours and hours and hours more inside their homes than they were historically used to also led to the desire to upgrade kitchens, upgrade bathrooms for driving that interior remodeling demand. So, a lot of things went very well and are still going very well for the single-family and remodeling markets.

Perhaps most importantly, single-family starts in 2020 finished just shy of one million units. Now, it sounds like a big number. One million new homes constructed in 2020. I mean, that's crazy. But that actually just represents only 57% of the all-time high of 1.73 million units at the market peak before the onset of the housing crisis over a decade ago, despite obviously higher US population and a presumptive buyer pool here in 2021 over a decade later.

So, to me, this is a justifiable boom. It's not a bubble in both new construction and remodeling. I'd say keep an eye out for a newly developed proprietary ITR remodeling market index that we're currently working on that indicates good times ahead for the remodeling market as well this year. And the fundamentals for new development are very strong. Certainly, with bond yields on the rise here in 2021 and mortgage rates very modestly following those higher so far in the year, we'll see some momentum come out of this market in 2022-2023, which is precisely what we're calling for our forecast of slowing growth in single-family markets during that time. But the imperative word there is growth, even if it is slowing. So, I would, for now, if you can manage residential supply shortages and labor issues, enjoy the boom, put the bubble concerns away, at least for this cycle, and enjoy the good times while they're here. We think they're here to stick around at least for the short to medium-term. Thanks for stopping by. See you on the next one.


Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.