K-shaped housing: regional and segment divergence emerges from inventory reset

Hello, and welcome to Global Research Unlocked, where we discuss what's rising from growth industries to rising risks and opportunities in global markets. I'm T.J. Thornton, Head of Product Marketing at B of A Global Research, and we're recording this episode on Tuesday, May 5th, 2026.

I think you've identified the biggest differentiator between the markets that are outperforming and underperforming, and that's the level of inventory that's out there. If you look in the Northeast, where we have the most outperforming markets, active listings, so inventory that's available for sale, is still down over 50% from 2019 levels. And if you talk to anybody that's trying to buy a home in the Northeast, they'll tell you about it, how difficult it is to find a home.

That compares to the Southeast and Texas, where listings are actually above 2019 levels. The housing market saw insatiable demand during COVID, fueled by low rates and significant migration shifts. But those drivers are no longer with us.

And some of the markets that saw in-migration also have seen eroding affordability, significant new housing builds, and now an oversupply. Rafe Jadrasich, Senior Home Builder and Building Products Analyst, joins us today to discuss a new tool the team has to measure the major housing markets. He'll also discuss whether there's reason to be constructive on building products, even if the builders themselves are challenged, and what could free up this rather more abundant market for homes.

Thanks, Rafe, for joining us. Thank you, TJ. I appreciate you having me on and excited to talk about the heat map and housing market.

Great. We know the housing market is sluggish. It's been bouncing along the bottom for a few years now.

How have the builders been coping with this fairly stagnant environment? As you mentioned, these affordability challenges have been well publicized. There's a variety of strategies that the home builders are using.

So in some cases, they've reduced price, either through rate buy downs, or outright just price reductions. They've also reduced the square footage of some of the homes or downspec them to make them a little bit more affordable. But I would say there is a clear differentiation.

What we're seeing is the softest trends are in the entry level. And then you're seeing some outperformance on the move up and luxury side. Okay, and Rafe, has the repair and remodel side of things fared any better?

Obviously, with rates being high, it's expensive to move. But is there any evidence to suggest that people are maybe staying in homes and upgrading them? Similar to home builders in the broader housing market, we're seeing bifurcated trends in the repair and remodel side.

So high end remodel projects that are being driven by the massive amount of home equity that's out there are actually holding up pretty well. We're also seeing resilience on exterior projects. And that's because those are non discretionary.

If you think about roofing or siding, it's difficult to delay those types of projects. Where we're seeing really significant softness is anything that can be deferred, particularly like the high ticket type purchases. So kitchen and bath remodels, flooring, those are the types of projects that can be pushed out.

And then another area that's soft is anything that's tied to just housing turnover. Like paint is a very good example. Flooring also here is something that typically gets done around when a home is sold before somebody moves in.

So when you think about the challenges, like what's what's driving the softness, again, housing turnover, so resale markets near 40 year low. The other headwind that the category is facing is you still have high financing costs. They have come down from peak levels, but often people use home equity lines of credit to finance some of these larger projects.

So it's still pretty elevated. And then project costs that have been going up in general. We've seen lots of price increases from building product manufacturers even more recently to offset some of the inflation we're seeing from the geopolitical backdrop.

And then the cost of contractors has gone up. The number of skilled trades that can do, say, a high end kitchen and bath remodel. It's not really growing.

It's probably shrinking every year. So the labor pool is very tight. And if you think about the project cost, the majority of it's actually on the labor side.

It's not on the building materials that are going in. So it's getting more expensive to do projects. And a lot of these things are being delayed because of that.

Now, on the do it yourself side of it, we think there's some behavioral changes that are going on. If you look at the pro business has held in much stronger than the do it yourself. It just has to do with millennials do less of their own projects compared to some of the earlier generations.

In general, still a pretty soft backdrop with some pockets of outperformance. OK, that's interesting, and it's also funny that you say that about millennials, because it's probably never been easier to figure out how to do these projects because there's something called YouTube. But despite that, obviously, people are generally hiring and hiring people that are becoming more and more expensive, of course.

So you talked about a lot of negatives. We have talked about a lot of negatives so far, but there are probably parts within home building and building products that you do like better than others. And what are those?

So within starting on the home building side, we prefer exposure to high end move up and that there's a few reasons for that. First, it's less rate sensitive because they're using their wealth more than they have to borrow less. You have more cash buyers there.

The demographic trends are also more favorable. Like think about like a lot of wealthy, retiring boomers, for example. So that segment, the demand trends tend to be a little bit better.

There also tends to be less competition for land. They're more concentrated geographically on the coast where home prices are holding up better than they compete more with private builders than the large scale public builders. And those are the areas where you have a little bit less cost inflation on the land side and then the home prices have held up better.

So we think that's a better ROE outlook for that segment versus the entry level where there's still a lot of pricing pressure and land costs are going up on the building product side. We think you want areas that are not tied directly to discretionary R&R or can outperform that. So we think like non-discretionary categories like roofing would be a good example.

What drives demand for those projects is the installed base rather than like new construction or discretionary projects. And then there's certain categories where you're actually seeing some material conversion trends where you're shifting from wood to composite and those tend to outperform and you can grow volume even if the market stays sluggish. Got it.

And to follow up there, I know you've talked about this, too, but I think last year, 2025 was kind of a light year when it came to hurricanes in particular and other storms, and that is kind of depressed the roofing category. And so things get more normal this year or in subsequent years. That's probably another modest tailwind for that group.

You do need to replace your roof if there's a hole in it. So I wanted to talk about this housing heat map. You released it a few weeks ago.

It's a way to visualize fundamentals by MSA to the big metropolitan areas. For anybody who remembers the various prognostications during COVID, it's ironic to see that New York, San Francisco and Chicago currently rank at the top in this heat map that you released. But just thinking about kind of the markets at the top, especially those, is it just a lack of supply that's boosting them or is it something else?

And then is it a concern that Texas and the southeast, which I believe are some of the more important markets for home builders historically, rank poorly on that measure? I think you've identified the biggest differentiator between the markets that are outperforming and underperforming, and that's the level of inventory that's out there. If you look in the northeast where we have the most outperforming markets, active listings, so inventory that's available for sale, is still down over 50 percent from 2019 levels.

And if you talk to anybody that's trying to buy a home in the northeast, they'll tell you about how difficult it is to find a home. That compares to the southeast in Texas, where listings are actually above 2019 levels, not significantly above, but it's still up. So I think the biggest differentiator when we looked at, we went to compare housing markets across the country is the amount of inventory that's out there.

There are other things that are happening. I think when you look at Texas in the southeast and you do have a lot of supply that has come on, both from a single family home builders, but also there's a lot of multifamily deliveries, route 24 and 25. We also have some headwinds from migration, both domestic migration to the south that we saw sort of boom during COVID that is still happening, but at a much slower rate than it was over the last few years.

And then international immigration has really slowed over the last year. So that was a big net positive to population growth in the south that has basically gone to neutral. So you have less just demand that's coming in that really pushed up demand over the last few years.

And then finally, I would say just on the job market employment backdrop, this is more of a broad national comment, but it's just less robust than it's been, particularly for some high income jobs. And you're seeing some concentrations in some southern cities that were doing really well, where you've seen just a lot slower job growth. The Dallas area, which is the biggest home building market in the US, 2023, they added almost 100,000 jobs.

That's come down like really substantially. So I think that's been another headwind that some of those southern cities have had. As you kind of round out the country, the West Coast is very mixed.

The Bay Area, where wealth has been booming, seems to have caught on with the stock market, doing really well. Home prices are up a lot. San Francisco is one of the best markets in our housing heat map.

When you look at Inland Empire, it's a lot softer. And the Mountain States sort of have a similar trend where the job backdrop has been a lot weaker. And you've seen those markets soften a lot.

Got it. The really high end sort of second home destinations are doing particularly well, right? I mean, they're some of the best markets, presumably because of the stock market gains that are being funneled into these places.

There's really high correlation right now between markets that are predominantly cash buyers. So again, like wealthier people that are buying out of wealth, not out of income and where you're seeing the highest home price appreciation. Got it.

So what you've done here, you've got this heat map. So you look at the MSAs and then you look at the builders that are exposed to those MSAs and you develop a builder composite score. You make the point that that score is correlated to builder ROEs or return on equity.

Could you explain why you think that relationship exists? And does the score tend to lead ROEs or is it kind of concurrent, meaning that if you've got a good score today, that means gains in the future or do they kind of happen at the same time? So if you think about what a home builder actually does, they're buying land.

They could do it through various ways, they can structure in different ways, but they are buying land. They develop it. And again, like whether they do it or they have a third party do it, they're still managing that process and they build a home on it and then they sell it.

And this process takes several years. So as a home builder, I need to make underwriting decisions today about what a home will cost to build, like what the land is going to cost, how much the home is going to cost and then what I can sell that at. And if you go back to, say, like a period like COVID, home prices go up 25, 30 percent in a short period of time.

So land that maybe I underwrote with an expectation of selling a house for $300,000, I can now sell that house for $400,000. And ultimately what that means is my return on my initial investment is going to be significantly higher than I ever anticipated because the underwriting assumptions that I made, the market ended up being much better than that. And I think what a lot of what we're trying to measure here is how have the market shifted over time.

So if a market's weakening and home prices are going to be obviously weaker because of that, it makes it a lot harder to have your ROE go up in that market versus a market that's strengthening. It's sort of the simple idea behind the housing heat map. What we found was that there tends to be a slight lead on the markets that you have exposure for as a home builder and then your forward ROE.

And again, it's because I'm underwriting land today that I'm going to deliver a home on a few years from now. OK, and Rafe, you're not particularly positive on your group. You have almost as many underperformed ratings as buy ratings on on the stocks.

What would get you to be more positive, though? I mean, obviously rates is one of them. I'm sure you're going to talk about that.

Are there attributes that your buy rated stocks tend to have? I actually think that investors tend to be a little bit overly focused on rates in the sector. The stocks trade with a lot more volatility than the underlying fundamentals.

And a lot of that volatility is driven by investors' expectations on mortgage rates. Just an example of this would be one of the best periods for home builder stocks was in 2023. Homebuilder stocks went up about 80 percent and massively outperformed the S&P 500.

And mortgage rates actually went up that year. It went up quite a bit. Last year, 2025, homebuilder stocks and housing stocks in general actually underperformed the market in a period when mortgage rates went down.

Ultimately, what matters is what's going on with the broader supply and demand backdrop. So like what I think would make me more positive is one is supply normalization. As a credit of homebuilders, we've seen housing starts pull back quite a bit.

We think they're down basically double digit in the second half of last year. So fewer starts is adding less supply to the market. We've also seen multifamily starts really slow dramatically through almost all of last year.

So again, you have less apartments coming onto the market. So that will help with pricing, the less supply that you have come on. The second is cost inflation, which has been a tailwind, something that we're a little bit cautious on now because we've seen so much recent inflation in pricing.

So just visibility on that normalizing and not seeing as much cost inflation coming through. And then the last is the job backdrop. If I have to choose between higher rates and higher job growth, I'd rather have better job growth with higher rates.

That's actually a better backdrop for homebuilders. If again, going back to 2023, when you had rates that were really elevated, it actually took a lot of existing home supply off the market. You get this lock in effect where home owners that have fixed rate mortgages, they're at attractive rates relative to their prevailing rate in the market.

I don't want to give up their mortgage rate. So active listings come down a lot. It actually helped homebuilders because they're the only game in town.

So their sales actually did really well relative to the existing home market. Our view is we'd rather just have strong job growth that will keep the underlying demand strong. When we put that all together, we're looking for a better job growth, a little bit less supply in the market.

And we think that's a much better backdrop for builder stocks from here. And that also will obviously help the repair model side. Got it, OK.

The point on supply is that we're getting there, right? I mean, other things need to go right, but on the supply side, the builders are being fairly disciplined and the multifamily deliveries that we'd seen over the last few years are slowing. That's right, and if you look, the finished spec inventory was very elevated at the end of 2025.

At the beginning of 25, end of 24, there was an expectation among a lot of companies that rates were going to come down. The housing market would have been really strong in 25. Rates did come down, but the housing market ended up being weak for a variety of reasons.

Because of that, they started too many homes in the first half of 25. So you finished the 2025 with too much spec inventory, it's finished spec homes on the ground that needed to get cleared through. And we're definitely seeing that process right now where builders are reducing the amount of spec that they have.

So they're selling more homes than they're starting. We're sort of going through that process now, and it should set us up for a better second half of the year. And the most important thing would be like pricing is really important.

They can raise price, reduce incentives that should lead to better ROEs. OK, last question is housing policy. We've heard about various housing policy ideas during this second phase of the Trump administration.

There's been talk of developing some federal lands, a 50 year mortgage, compelling builders to build on land that they have with this idea that it's kind of the builder's fault. They need to just do more to increase supply. But has this really been just talk?

Have we seen any movement on housing policy? And do you think there are measures that could actually happen and that would have impact? So far, there's been very little.

Impact to the actual homebuilders. There is something called the Road to Housing Act that is working its way through Congress now, and there's been a few executive orders that have been announced. The places where we've seen the most traction has been a ban on single single family rental purchases by institutional investors.

But even that and the details are still being worked out. Ultimately, the threshold that they put on it was pretty high for what constitutes a an institutional investor. So we don't expect major impact there.

Maybe that's low single digit percent of starts, but it could even be like less than that. I think the real challenge that the administration has run into and is that this is still a local business and home where homebuilders really need help and support is expediting the approval process with municipalities to get more homes started and to just get things approved. So because it's a local issue, there's not much that can be done at the federal level.

So it's a very slow process to change all this. So far, we haven't seen much traction there. The developing federal land that there has been some push from the administration.

The issue is it needs to be in places where people want to live and there isn't that much of that. There's been a little bit in Florida, but broadly speaking, we haven't seen any major changes. OK, Rafe, really appreciate the time.

That was a great discussion. Thanks, TJ. Thanks for having me on.

It would be fair to say that housing overall is weak, but there are some nuances. There's relative strength in the higher end and move up markets, and there are certain builders more focused on those areas. Higher end home remodel projects are OK, too, but within building products, Rafe prefers those companies exposed to less discretionary projects like roofing or siding.

Housing prices in the Northeast are relatively strong, partly because of a lack of supply, while markets that thrived on big domestic migration as well as international migration are weak, particularly as supply increased in many of them. But while the picture isn't as pretty as that new five bedroom modern farmhouse that's going up down the street, there are some positives, especially on the supply side, as the reality of the market has caused a slowdown in starts. And we're working through some of last year's overbuilt in both single family and multifamily.

Thanks for joining. Bank of America and B of A Securities are the marketing names for the global banking businesses and global markets businesses, which includes B of A Global Research of Bank of America Corporation. Lending, derivatives and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America and a member FDIC Securities Trading Research Strategic Advisory and other investment banking and markets activities are performed globally by affiliates of Bank of America Corporation, including in the United States, B of A Securities Inc., a registered broker dealer and member of FINRA and SIPC and in other jurisdictions by locally registered entities.

Copyright 2026 Bank of America Corporation, all rights reserved.