A Constructive Outlook

The worst may be over for residential investment.

The global financial crisis cast a lingering shadow over residential investment. Since 2020, the rapid runup and subsequent flattening of house prices raised worries of another cycle of housing stress. But those concerns may be overdone. More construction is needed.

The pandemic surge in home demand demonstrated that the U.S. has an undersupply of housing. Today, the inventory of homes for sale is depleted, standing at a level last seen in 1980, despite a population that has grown 47% over the same interval. Construction has room to grow without repeating the excesses of the housing bubble. Through the pre-COVID cycle, housing starts barely returned to the levels of the 1990s.

The median homeowner stayed put in the pandemic era, refinancing into very low mortgage rates. Some have lucked into a carry trade, paying an interest rate on their seasoned mortgage that is lower than the income offered by safe assets like money market funds. The higher interest rate on new mortgages renders those homeowners less likely to move. By staying put, they constrain inventories (supporting house prices), and they become customers for home renovation projects.

Housing Activity and Inventory