Housing bubbles are temporary periods of months or years characterized by high demand, low supply, and prices inflated above fundamentals. These bubbles are caused by a variety of factors including rising economic prosperity, low interest rates, a wider supply of mortgage products, and easily accessible credit. The reason house prices are rising is that housing is expensive to build. It's hard to find people to build, the government makes construction difficult, and materials are expensive.
Could House Prices Decline Yes, they could slow down their rate of increase, but inflation would also need to slow down. It's hard to say exactly what will happen, but I don't see an accident happening soon. The resulting increase in the price-to-rent ratio of housing, a barometer of relative housing costs, reflected a moderate pre-pandemic increase in home valuations. The real reason house prices are rising is that there are more owner-occupants than ever before and there aren't enough homes for those owner-occupants.
In fact, the proportion of owner-occupier homes is increasing much faster than the number of investor-owned homes. The historical relationship between mortgage rates and home prices does not address how home price appreciation changes when interest rates rise rapidly. For example, existing superstar cities and towns could moderate their housing costs by allowing for greater density, but they have chosen not to. As people see faster price appreciation, their expectations for future appreciation and their demand for housing increase.
Even after the worst housing crash in history, prices haven't been close to rising as quickly as they did in the 1970s. Local governments have further hampered the supply of new housing with zoning and construction restrictions that will remain a problem even when housing construction supply chain issues are resolved. However, with home prices rising exponentially faster than incomes, it's increasingly difficult to do so, said Francesca Ortegren, data scientist at Clever Real Estate. Due to several factors, house prices have behaved very differently in the wake of the fall in COVID-19 than after the previous recession.
With supply chain problems, construction time has increased significantly and the actual number of homes being built is very low. But that answer falters in, say, Salt Lake City when asking for prices that seem absurd to local shoppers seems reasonable for someone moving from Seattle. Since 1976, mortgage interest rates and home price appreciation have had a positive but weak relationship. With more relatively wealthy people bidding for a limited housing stock, the price of entry-level homes and the price-to-rent ratio accelerate as cities fill up and approach superstar status.
The cost of housing for the user is currently very low because mortgage interest rates are low and the expected home price appreciation is very high.