US Home Supply Is Increasing, Higher Construction Costs Could Keep Prices Elevated

Home Price Gains Are Greater Than The 2005/2006 Housing Bubble Peak

US home prices have surged over the past year, driven by a mix of low interest rates, limited housing inventory, and a strong economy recovering from pandemic-related stimulus. In May 2021, the Case-Shiller Home Price Index climbed 17% year-over-year, surpassing the peak of the 2005/2006 housing bubble, which had reached 15% in September 2005. Today, national home prices are 38% above that previous high.

While some are calling this a second housing bubble, the factors behind today’s surge are quite different from the speculative lending and risky financing seen in 2005. Back then, banks were aggressively offering loans with little oversight. These days, while lending is still competitive, it's not as reckless. There are no more TV shows about people quitting their jobs to flip houses for quick profits—this cycle is more about supply and demand than speculation.

The pandemic caused a sudden economic shift. At first, uncertainty led to business closures, layoffs, and reduced spending. But governments around the world injected massive fiscal stimulus to boost growth. That helped the economy rebound, but it also created a mismatch between supply and demand. Consumers have more money, but there aren’t enough goods or homes to meet the rising demand. This imbalance has fueled price increases across multiple sectors, including real estate.

Source: Federal Reserve and Case-Shiller
Takeaway: Home prices are now 38% above the previous peak, and the 17% annual increase in May 2021 outpaced the 15% recorded in 2005.

Long-term home price trends depend on affordability, which is influenced by wages and interest rates. When wages rise and borrowing costs fall, buyers can afford higher prices. Conversely, if wages stagnate or interest rates climb, affordability drops, and prices may stabilize or decline.

In 2020, average wages grew by about 5%, far below the current home price gains of 17%. This gap isn’t sustainable in the long run. Either wages will need to rise significantly, or home prices will have to slow down as buyers become less able to afford them.

Home Price Increases This Cycle Are Not As Speculative - It's More About Supply And Demand

Earlier this year, Emily Badger and Quoctrung Bui of the New York Times published an article titled "Where Have All the Houses Gone?" highlighting a sharp drop in available housing inventory. According to Altos Research, the number of homes on the market has hit its lowest level since data collection began. Inventory was around 1.0 to 1.2 million in 2015–2016, then gradually declined through 2019. The pandemic accelerated the trend as builders delayed projects due to economic uncertainty. Today, inventory is 50% below normal levels—a significant housing shortage compared to historical norms.

Source: Altos Research
Takeaway: US housing inventory is currently 50% below normal levels as of August 2021.

Altos Research noted that the tight supply is beginning to ease slightly. “Inventory is still 50% below normal,” said Mike Simonsen. “It’s like a car going 100 mph—if you take your foot off the gas, it slows down, but it’s still moving fast.” This suggests that while the market is cooling, it’s not crashing.

Demand remains strong as the economy continues to benefit from pandemic-era fiscal support. Rich Barton, Zillow’s co-founder and CEO, highlighted how the pandemic has changed work dynamics. “Work and location used to be tied together, but now people can work from anywhere,” he said. This shift is creating new housing patterns and spreading job opportunities beyond traditional urban centers.

Building Materials & Labor Costs Are Rising

Rising input costs and inflation are affecting everything from groceries to construction. According to NAHBNow, residential construction costs have risen 19% over the past year. From 2015 to 2020, the average annual increase was under 2%, but in 2021, the rise jumped to over 12% year-to-date.

Source: NAHBNow and Bureau of Labor Statistics

Companies are also reporting increased inflation concerns. Bank of America found that mentions of "inflation" during earnings calls rose 1,100% in Q2 2021 compared to the same period in 2020.

Source: Bank of America Research
Takeaway: Mentions of inflation during company earnings calls rose 1,100% year-over-year.

Homebuilders are facing higher material costs and labor shortages. Between December 2019 and August 2021, several key building materials saw significant price increases:

• Copper +56%
• Steel +44%
• Drywall +26%
• Lumber +17%
• Insulation +13%
• Asphalt +7%
• Labor +6%

Construction costs make up about 60% of a new home’s price. When these costs rise, they eventually get passed on to buyers, often after a delay of 6 to 12 months.

Source: NAHB Cost of New Home Construction Survey

Source: NAHB Cost Of New Home Construction Survey
Takeaway: Construction costs account for approximately 60% of a new home’s price, with builder profit margins typically between 8% and 10%.

Equipment Radar has developed a tool to help model how changes in construction costs affect home prices. You can explore it here: [Airtable Interactive Spreadsheet](#).

Residential Construction Stands To Benefit

With limited housing supply, construction companies and equipment dealers are well-positioned to benefit. More machines and tools will be needed to address the inventory gap. Additionally, as labor shortages persist, construction firms are likely to invest more in automation and technology to improve productivity.

Conclusion

The current home price surge may last longer than the 2005/2006 bubble, given higher construction costs and low inventory. While a slowdown is possible, a major crash similar to 2005 is less likely. The post-pandemic economy has also changed—governments are more willing to use fiscal stimulus to support markets during downturns.

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