Source: Forbes — 

Key Takeaways

• Many factors contributed to the rapid rise in home and rent prices over the past few years.
• Because of the long process from building to selling homes, it takes time for housing inflation to slow.
• The outlook for 2023 is cloudy, with many factors coming into play.

Over the past few years, the trend of rising home prices has left many would-be buyers priced out of the real estate market. Some are even hoping for a housing crash to allow them to buy a home. Here is why housing inflation spiked during the past few years and why any slowing is unlikely, at least in the near term.

Rapid rise in home prices

While home prices were rising before the pandemic, this black swan event increased the speed for a variety of reasons.

First, the pandemic introduced everyone to remote work, where you could live anywhere, not just within a short distance of your office. Many people left large, expensive metropolitan areas for the suburbs and rural areas that had lower living costs.

Another factor was investors taking advantage of easy lending terms, low interest rates, and the opportunity to increase their net worth on paper. They bought properties to rent to third parties. As this trend became a popular way to earn money on the side, more people decided to try their hand at buying and renting properties for passive income.

Due to supply chain issues, fewer new homes were built during the pandemic. During this time, homes under construction were delayed further by local municipalities taking a long time to issue permits. Even as these issues have eased recently, many home builders are pausing projects due to fears of a recession and weak demand.

Commodity prices for lumber also experienced a rapid increase as mills and housing-related industries had to restart after closing during the pandemic. It took time to gear up manufacturing facilities, which meant home-building supplies were in short supply. A tariff on Canadian lumber imports to the U.S. has also made lumber more expensive. The move was intended to protect the American lumber supply chain but only served to make the final cost of a new home more expensive.

Existing homeowners were also reluctant to move due to the low interest rates and monthly payments on their existing mortgages. This restricted the supply of homes on the market, as moving didn’t make sense for many families since the rent or mortgage on destination homes would have stretched their budgets.