Since the early twentieth century, housing prices in the United States and other developed countries have continued to rise.

But major world events have caused drastic fluctuations in property value.

During the COVID-19 pandemic, for example, the housing market remained resilient. Record demand outpaced the number of homes available which caused prices to increase at their fastest pace in forty years. It’s unclear if, and when, housing prices will cool off.

So, what causes home prices to rise and fall?

This is the housing market, unpacked.

Supply and demand ultimately determine house prices, but there are additional factors that can affect the market.

The cost of building impacts supply – particularly when supply chain delays make it challenging to get materials.

Labor also plays a part in the market. The construction sector still employs fewer workers than before the pandemic despite the increased demand for homes.

Interest rates and inflation are also key factors.

The U.S. Federal Reserve typically lowers interest rates to boost economic activity.

During the pandemic, for example, the Fed lowered short-term interest rates to near zero and mortgage interest rates fell to the lowest levels on record.

Inflation is the average increase in prices consumers pay for goods and services.

The Fed aims for two percent inflation annually, but it can rise and fall depending on changes in supply and demand.

Home prices and rents tend to move along with overall inflation. If the average prices of goods, services, wages, and business costs are rising rapidly, home prices and rents will likely rise quickly, too.

But sometimes housing costs can increase more rapidly. That’s what happened with single-family homes when demand surged during the pandemic.

Following World War II, populations grew, and urban areas developed into vibrant economies with high-paying jobs.

People moved closer to cities, so demand increased. Supply became limited in these high-density locations, and space restrictions and zoning laws made new constructions challenging.

The demand began to outweigh the supply, so prices increased.

It’s estimated that housing prices have nearly tripled since the 1950s – even after adjusting for inflation.

During the Global Financial Crisis in the early 2000s, home prices plummeted.

Households took on large mortgage debts to enable home purchases. With so many people looking to buy homes, a building boom happened across larger states where plenty of land was available for construction.

This created an overabundance in supply and homes were sometimes priced much higher than the cost of land and construction.

Prices eventually tumbled during the recession, falling 34 percent by 2012.

The remote work requirements of the COVID-19 pandemic had people re-evaluating their space and location needs. Consumer spending shifted from things like traveling and dining out to home office furniture and electronics.

As priorities shifted, the housing market saw an initial drop in desire for dense, expensive cities like New York, San Francisco, and Washington D.C.

… and more interest in less dense, more affordable areas like Miami and Dallas.

Millennials – who make up about 25 percent of the US population – have always been reluctant to move out of these cities, preferring to rent.

But during the pandemic, Millennials began prioritizing space over job proximity. As they searched for homes outside of cities, they contributed to the rise in suburban house prices.

Demand for urban housing eventually returned, but also remained steady in the suburbs.

This heightened interest applied to all types of builds, whether an apartment or single-family home.

With inventory at all-time lows, renters and buyers faced prices thirteen percent above pre-pandemic levels in the second quarter of 2021.

Questions still remain – is the U.S. in a housing bubble? Will prices fall?