The U.S. housing market has undergone one of the most dramatic booms in recent history. Since the onset of the COVID-19 pandemic, home prices have surged more than 40% in just two years. By 2023, the Case-Shiller Home Price Index was again approaching record highs, even as mortgage rates climbed to their highest levels in two decades. This dual pressure of soaring prices and elevated borrowing costs has left many Americans struggling to afford a home.
How did the market arrive at this crossroads, and what does it mean for the broader economy? This article takes a closer look at the underlying dynamics shaping today’s U.S. residential real estate market.
Why the Housing Market Matters
A home is more than shelter—it is also a key driver and indicator of economic health. Real estate influences consumer spending, employment, and financial stability, while also representing one of the largest components of household wealth.
• Economic Impact: Housing-related activities contribute roughly 15–18% of U.S. GDP, according to the National Association of Home Builders (NAHB). During downturns, the housing sector is often among the first to contract, but it can also be one of the earliest to recover when growth resumes.
• Financialization: Mortgages are frequently securitized into mortgage-backed securities (MBS), making housing a critical part of global financial markets. MBS is the second-largest fixed-income market after U.S. Treasuries, meaning housing risks can ripple far beyond American households.
Key Segments of the Housing Market
U.S. real estate can be divided by both function and structure.
By Market Type:
• New Homes: Represent fresh construction and contribute directly to GDP growth, as they generate both demand and supply.
• Existing Homes: Make up the majority of transactions due to early urbanization, and are essential to overall market liquidity.
By Structure:
• Single-Family Homes: Detached units designed for one household. They offer privacy and space but carry higher costs.
• Multi-Family Homes: Apartments or condos with multiple units. Typically more affordable, easier to rent, and central to urban housing demand.
For this article, we focus primarily on the residential housing market.
Housing Market Indicators Investors Watch Closely
1. New Home Sales
• Reported monthly by the U.S. Census Bureau.
• Considered a timely gauge of market demand, since sales are recorded when contracts are signed, not when transactions close.
• A sustained decline in sales often signals weakening economic momentum.
2. Inventory-to-Sales Ratio
• Measures how long the current supply of unsold homes would last at the current sales pace.
• A high ratio indicates oversupply; a low ratio suggests scarcity.
• Since 2023, the ratio for new homes has diverged sharply from existing homes due to limited resale inventory.
3. Case-Shiller Home Price Index
• Published monthly by S&P CoreLogic.
• Tracks changes in national home values and is widely followed by investors, the Federal Reserve, and the futures market.
• Critical because:
• Housing prices shape both rents and the U.S. CPI, directly affecting inflation.
• It serves as the benchmark for CME housing futures and options.
4. Mortgage Rates
• Reported weekly by Freddie Mac.
• Since most U.S. buyers rely on 30-year fixed-rate mortgages, shifts in rates directly impact affordability and demand.
• By August 2023, mortgage rates had reached their highest point since 2000, pushing applications to near three-decade lows.
The Most Widely Watched Housing Indicators by Investors
New Home Sales:
New home sales are the most direct indicator when analyzing the US housing market. The U.S. Census Bureau releases monthly economic indicators for new home sales at the end of each month.
It's essential to note that statistics are gathered when clients sign a sales contract or pay a deposit. At this time, the house can be constructed at any stage, and full payment is not necessarily required.
Since consumer income is highly sensitive to new home sales, which are included in economic consumption growth, it has become an excellent indicator of economic recession or recovery. For instance, when new home sales decline for several consecutive months, it usually signals an economic downturn.
New Home Sales vs. Existing Home Sales
New home purchases represent only about 10% of the overall housing market. However, new home sales are still considered a more timely indicator of the housing market than existing homes because they are counted upon signing the contract, while existing homes' data is included only after contracts are completed, representing purchasing activities with some lag.
Inventory-to-Sales Ratio
The inventory-to-sales ratio, which indicates the relationship between the size of the inventory for sale and the number of homes on the market, is released monthly by the U.S. Census Bureau. Also known as the months' supply of homes or housing inventory turnover ratio, it helps analysts assess the state of the housing market.
The indicator is divided into the inventory-to-sales ratio for new homes and the inventory-to-sales ratio for existing homes. The higher the data, the higher the inventory. For example, for new homes, the new home inventory-to-sales ratio indicates "how long will the current unsold inventory last at the current sales rate if no additional new homes are built?"
As depicted in the image above, there has been a substantial disparity between new home and existing home inventory-to-sales ratios since 2023. This divergence is attributed to imbalances of supply and demand in the two markets caused by mortgage interest rates, with the existing home market facing a severe shortage of available properties.
2. Case-Shiller US National Home Price Index
The S&P CoreLogic Case-Shiller U.S. National Home Price Index tracks changes in the value of residential properties in the US, published by S&P at 9 a.m. Eastern Time on the last Tuesday of each month. It's important to note that the S&P CoreLogic Case-Shiller U.S. National Home Price Index is calculated using a three-month moving average, so there is a lag of two months in the index, but it remains the most widely watched housing indicator in the capital market.
The importance of the S&P CoreLogic Case-Shiller U.S. National Home Price Index for the economy can be summarized as follows:
● The supply and demand of the real estate market determine house prices, which will affect new home sales.
● House prices also affect housing rents, and rent is an important component of the US CPI. In other words, house prices have a significant impact on US inflation. Therefore, the S&P CoreLogic Case-Shiller U.S. National Home Price Index is also one of the indicators that the Federal Reserve is concerned about.
● The S&P CoreLogic Case-Shiller U.S. National Home Price Index is also used as the underlying pricing mechanism for Chicago Mercantile Exchange (CME) real estate futures and options.
Note: Indexes are unmanaged and cannot be directly invested. Past performance is no indication of future results. Investing involves risk and the potential to lose principal.
3. Mortgage Interest Rates
When analyzing the real estate market, it's important to consider the mortgage environment because mortgages are a primary source of funding for housing, affecting the overall housing supply and demand. Mortgage data is released weekly by Freddie Mac and has some guidance significance for monthly new home sales.
As most US homeowners hold 30-year fixed-rate mortgages, this indicator is frequently used to observe the mortgage environment. As of August 2023, 30-year fixed-rate mortgages have risen to the highest levels since December 2000, causing mortgage applications to fall to their lowest levels in 28 years.
Note: Past performance is no indication of future results. Investing involves risk and the potential to lose principal.
What Changed in the Past Few Years?
1. Ultra-Low Rates Fueled a Buying Frenzy (2020–2021)
During the pandemic, the Federal Reserve’s aggressive monetary easing and government subsidies unleashed a flood of liquidity. Mortgage rates dropped to record lows, and remote work boosted demand for larger homes.
Bloomberg reported the median American home grew in value by US$52,667 in just one year from December 2020 to December 2021, which exceeded the $50,000 earned by the median American worker during that time.
2. Rate Hikes Changed the Landscape (2022–2023)
As the Fed raised rates to fight inflation, the average 30-year mortgage surged above 7% for the first time in 20 years. Higher borrowing costs dampened affordability, reducing both new and existing home sales.
• Buyers faced reduced purchasing power, particularly for single-family homes.
• Sellers became reluctant to move. Many locked in ultra-low mortgage rates during the pandemic and are unwilling to give them up. This “rate lock-in” effect has kept existing home inventory exceptionally tight.
3. Prices Stayed High Despite Slowing Sales
Even as transactions slowed, home prices resumed their climb due to persistent supply shortages. Between 2012 and 2022, U.S. household formation (1.4 million annually) consistently outpaced housing construction (1.2 million annually).
Developers shifted focus from single-family homes to multi-unit rentals, responding to a strong rental market. Still, the supply gap widened, pushing national rents to record highs in 2022.
Market Implications for Investors
Housing data may not swing financial markets as dramatically as jobs reports, but it provides valuable insight into the business cycle.
• Equities: Stronger-than-expected new home construction often lifts homebuilder and real estate stocks.
• Bonds: Weaker housing activity can reinforce recession fears, boosting demand for safe-haven Treasuries.
• Policy: With rents feeding into CPI, housing remains a focal point for Federal Reserve decision-making.
Conclusion: Opportunity or Risk?
The U.S. housing market is at a crossroads. Structural supply shortages and demographic demand are keeping prices elevated, even as rising mortgage rates weigh on affordability. Investors and policymakers face a paradox: high housing costs reflect economic strength but also amplify inequality and financial risks.
For homebuyers, the decision has never been more complex—buy now at high prices with the risk of rate volatility, or wait and face potentially even scarcer inventory later. For investors, housing remains both an economic barometer and a source of opportunity—but one that requires careful attention to interest rates, supply constraints, and broader macroeconomic conditions.
Disclaimer:
This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. It is provided without respect to individual investors’ financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. You should consider the appropriateness of this information having regard to your relevant personal circumstances before making any investment decisions. Past investment performance does not indicate or guarantee future success. Returns will vary, and all investments carry risks, including loss of principal. Tradient makes no representation or warranty as to its adequacy, completeness, accuracy or timeline for any particular purpose of the above content.