Housing Market Heats Up after COVID-19

By Tyler Mondres

The COVID-19 pandemic created the deepest economic contraction in modern U.S. history and led to considerable uncertainty. However, it also teed up the conditions that created a red hot housing market across the country.

National overview

The rapid spread of COVID-19 and the resulting state shutdowns actually stimulated demand for homes. Homebuyers fled dense urban centers in search of more space and amenities in suburban, exurban, and rural areas. As household spending fell and savings rose (with robust government support), early retirees and millennials starting families took advantage of record low mortgage rates to purchase homes.

Supply, on the other hand, has lagged demand. Fierce competition among homebuyers, with homes routinely selling above listing price, depleted existing home inventories to near-record lows. While new housing starts are trending upward, shortage of skilled labor, supply chain bottlenecks, and materials shortages drastically increased the costs of construction and dampened building activity. For example, lumber prices reached record highs this spring, with the Producer Price Index for lumber increasing by a record 113.5% year-over-year.

While new and existing home sales moderated in May, home values continue to rise with no signs of slowing. Home prices rose 10.4% in 2020, according to the S&P Case-Shiller U.S. National Home Price Index, the strongest annual growth since 2013. As of April 2021, the latest reading as of this post, home prices were up 14.6% year-over-year.

Looking ahead, combination of low borrowing costs, tight inventories and continued supply-chain constraints are expected to maintain upward pressure on home prices through the end of 2022 and into 2023.

FHFA Regional Breakdowns

According to the FHFA Purchase Only Index, overall home prices increased across all 50 states in 2020. The greatest appreciation was in the Pacific Northwest and Mountain states, such as Idaho (20.9%), Montana (15.5%), Utah (15.5%), and Washington (13.7%). There was also strong price appreciation in New England, such as in Connecticut (14.2%), Maine (13.9%), New Hampshire (13.5%) and Rhode Island (13.2%).

The central and the noncontiguous states saw lower, but still-robust, price gains. Home values rose less than 8% in only 6 states (Louisiana, Hawaii, North Dakota, Alaska, Illinois, and West Virginia).

Home values also increased across-the-board in nonmetropolitan areas of the country, according to the FHFA All-Transaction Index. Similar to the overall index, prices grew the most (between 8 and 11%) in the Pacific Northwest, Mountain states, and in the Northeast. Likewise, growth was more muted in the non-metro areas of the Midwest and South Central states. Only four states (Louisiana, Illinois, North Dakota, and Alaska) recorded annual home price appreciation below 4%.

Zillow zip code analysis

The Zillow Home Value Index provides a more granular view of typical home price growth at the zip code level. The below map represents data reported as of May 31, 2021. Deeper shades of red represent greater increases in home values and deeper shades of blue represent regions that have seen home values decline. The chart illustrates just how hot the housing market remains across the country, with red dominating the map (see further below for a closer look at different regions of the country).

However, some regions have seen home values decline over the course of the year, particularly in rural areas in the center of the country. These blue pockets appear along the northern half of the Appalachian Mountains, surrounding the Mississippi Delta, and peppered throughout the Midwest and Southwestern states. This aligns with observations from the Federal Reserve Community Depository Institutions Advisory Council, which reported that single-family home prices continued to rise across nearly all Districts in the first quarter of the year except for in rural areas with declining populations or broadband limitations. (Click to view zip-code level maps for New England, the Mid-Atlantic, the Southeast, the East South Central region, the West South Central region, the Midwest, the Great Plains, the Rocky Mountain states and the Pacific Coast.)

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About Author

Tyler Mondres

Tyler Mondres is director of economic research at ABA and a frequent contributor on economic and fintech topics to the ABA Banking Journal.