Ali Wolf, my colleague and chief economist at Zonda, asked regional directors on a recent market update call to describe our housing markets in one to three words. I currently cover the Midwest region for Zonda and its major housing markets and used the descriptor “hot for the Midwest.” While Chicago, Indianapolis, and the Twin Cities are neither “habanero hot” like Austin nor “blistering” like Denver, the Midwest is certainly holding its own during the current housing boom. A housing supply shortage, narrowing new-to-resale home price gap, and favorable interest rates are fueling demand from move-up and entry-level buyers and fostering growth in the Midwest not experienced since the Great Recession of 2007 through 2009.

Migration into warm climate, tax-friendly, affordable states is driving exceptionally strong and, in some cases, record-breaking housing demand in other U.S. regions. The South and Southwest regions were already benefiting from favorable demographics and migration, and the onset of the COVID-19 pandemic simply accelerated those trends. While the Midwest isn’t the beneficiary of strong in-migration, it has numerous other fundamentals bolstering consumer demand.

First and foremost, the Midwest is undersupplied in both new and resale housing. Builders in this region have been largely conservative post-recession resulting in not enough homes to meet demand. Our new-home, for-sale proprietary data shows strong contract sales, starts and closings growth, and limited finished vacant home inventory.

Second, the narrowing new-to-resale median home price gap is benefiting builders, as consumers can justify the new-home premium. There is less than one month of resale housing supply available in major Midwest markets, compared with four to five months of supply in a balanced market. This extremely tight supply is contributing to strong price appreciation. Price appreciation in the existing home market coupled with builders’ ability to pivot to smaller homes on smaller lots has resulted in a narrowing gap. Generally speaking, these dynamics point consumers in the direction of new construction.

Finally, favorable interest rates have encouraged consumers to buy now. They allow consumers to stretch their monthly payment and afford significantly more. As builders have rapidly raised home prices to account for rising material costs, some housing has gone from fulfilling entry-level buyer demand to move-up buyer demand, but contracts are getting signed at a strong rate—higher than we have seen in quite some time.

However, there are several factors at play that will likely temper growth in the Midwest, including rising mortgage interest rates, high land prices, lack of developed lots, and rapidly rising home prices. Supply and labor shortages have already slowed growth from its full potential, and it’s only a matter of time before these other factors creep in. The silver lining is that housing supply is well below consumer demand, and it’s great to see the Midwest share in the housing industry’s big boom.