Of all the impacts of the pandemic, one of the most noticeable to the average American is the rapid increase in housing prices. After the initial shock of the pandemic, housing prices have exploded.

National headlines talk about a shortage of housing inventory and a lack of people listing their homes. This is a clean explanation. It makes sense. After all, many people ask themselves — where will I go if I sell?

The story of rising housing prices, though, is more complex than a dearth of listings. Many of the trends that are causing the acceleration in prices have been a decade in the making and not just point-in-time events triggered by the pandemic. Few cities are more representative of these trends than Raleigh, NC.

Located in central North Carolina, Raleigh has been an “up-and-coming” city for over a decade. It emerged as a warmer, lower cost, central hub for the east coast and has been growing at a rapid pace. US population growth was ~6.3% from 2011–2020 while population growth in the city of Raleigh was ~17.9%, according to US Census data.

Much of this growth was due to an increase in net migration from all parts of the country, though most notably from the upper half of the east coast. Of the top 100 out-of-state counties with the most people moving to Wake County (home to Raleigh), 37% are in the Northeast or Mid-Atlantic, far more than would be expected given their population size.

In the same 2011–2020 time period, the estimated number of housing units in Raleigh grew by ~16.1%. Given the number of households that moved to Raleigh, this equates to a shortage of ~2,000 housing units. In other words, to have a home for every new household in Raleigh, 2,000 additional units needed to be built.

Since the data was reported, Apple, Google, and others have all announced big hiring plans in the region, in addition to local tech companies like Pendo and Red Hat that are in growth mode. Given this influx of jobs, growth in Raleigh is likely to continue or accelerate in the coming years.

Finding #1: Population increased faster than housing and has a positive long-term outlook

Holding all else equal, economics 101 tells us that more people trying to buy the same amount of homes will increase prices. The problem recently has been that not only is the population of buyers up, but there’s more competition from new places.

Investors are increasing their activity in the Triangle (Raleigh and its surrounding area). In Raleigh, investors bought nearly 1 in 4 homes in Q4 2021 and 1 in 5 in next door Durham, according to a WRAL Tech Wire report from data provided by Redfin.

Many of these homes are rented, never hitting the market again. These buyers typically come in with all cash offers and a fast close, which is a much more attractive offer for a seller, or are buying valuable new construction, as reported by the WSJ.

Raleigh may be an extreme example of investor activity, but the trend holds nationwide. According to a Redfin analysis, about 18% of homes were bought by investors in Q4 2021, a percentage that has been steadily increasing over time but jumped meaningfully after the initial shock of the early pandemic.

An interesting phenomenon that this is creating is the speed with which homes are selling. Many headlines will talk about the lack of inventory (available homes for sale) and will talk about people choosing not to list their homes for sale.

The data tells a slightly different story in Raleigh, though. Inventory — the number of unique homes available during a given month — is down dramatically not just in the past two years, but for the past decade, according to Redfin data. An annual snapshot in the month of May — usually a busy real estate month — shows inventory at a third of where it was in May 2021 compared to a decade earlier.

However, the number of homes listed and sold annually has actually remained fairly constant compared to inventory. The number of annual listings is up since 2012 and down just ~10% from its peak in 2016. In other words, a lack of home listings is just a small part of the problem.

The logical next step is to say that homes are just selling faster due to the increased demand. In the past, inventory would carry over from month-to-month. You might have 2,000 homes that didn’t sell from the prior month and 1,000 new homes listed, totaling an inventory of 3,000 for the month. This isn’t happening anymore. Homes are selling faster — dramatically faster.

Now, homes are on the market for an average of 34 days (though, any recent home buyer in Raleigh will tell you a good home is available <7 days). This means that inventory is turning over essentially every month, and the only homes available are those that are newly listed.

Indeed, the monthly inventory is reaching parity with new listings as of early 2022 in Raleigh, something that would’ve been unthinkable back in 2012–2014 before the downward trend started. In effect, the only homes for sale in a given month are those that are listed within the same month.

So, the problem driving up home prices isn’t supply, it’s demand. More households— and more available buyers — for the same number of listings is driving up prices. It’s a textbook econ 101 principle that is playing out in the real estate market nationwide, and most notably in Raleigh.

With faster selling homes, and declining inventory, prices are rising, with a near perfect inverse correlation (as one goes up, the other goes down).

Finding #2: More buying competition — not less homes — is driving price growth

A third influential factor driving price appreciation is a pretty simple one. Over the past decade, people could borrow more money and have the same monthly payment.

Most people take out a mortgage to pay for a home. In the early periods of paying back the loan, the majority of your payment goes toward interest — well above 50% early in the loan, depending on the interest rate.

What this means is that without changing anything else, a lower interest rate lowers your monthly payment. And, as you can guess, interest rates dropped from 2011–2021 by about 1.5 percentage points, from 4.45% to 2.96%.

On a $400,000 home purchase with a 20% down payment, this equates to a material monthly difference. At the 2021 interest rate (2.96%) you’d likely pay around $1,342 per month for your mortgage (principal + interest). At the 2011 interest rate (4.45%), you’d pay $1,612.

You would have paid $270 less every month, for 30 years, for the exact same home price in 2021 compared to 2011.

Said another way, assuming a fixed 20% down payment you get $80,000 more home value for the same monthly payment with the 2021 interest rate versus the 2011 interest rate.

During the past decade, the interest rate decreased, and wages generally increased, giving a two-sided benefit to purchasing power. People could afford more because they made more, and they could afford even more than that because a falling interest rate decreased payments for the same priced home.

This trend is reversing over the past couple months as interest rates rise, but anyone that purchased over the past few years locked in a historically low interest rate and historically high purchasing power.

Finding #3: Lower interest rates increased purchasing power

Bring it all together and you have a perfect storm of housing unaffordability:

1. There’s more people than homes

2. There are more buying personas (individuals, investors) than previously

3. Interest rates have fallen

Each of these on their own can cause a rise in prices, and all three together create a rapid acceleration like we’ve seen over the past two years. We didn’t even talk about the cost to build a new home — from land cost to permits to materials & labor — which has also grown out of control.

Raleigh may be unique in its fast growth and high investor activity, but its representative of the trends happening in many towns and cities today. This trend, though, can’t possibly be sustainable.

Talk to real estate agents in the region and they’ll tell you it’s still more affordable than the likes of Boston and New York, suggesting prices can keep rising. The thing is, you don’t get Boston or New York salaries living in Raleigh, nor does it yet have the same cultural amenities you can find in those cities, so it’s not really a realistic comparison.

Rising interest rates will likely lead to slowing price appreciation. Slowing price appreciation may lead to a pull back in investor activity as returns decrease. These should help stabilize the market.

Or, rising interest rates might lead to more investor activity as their ability to pay in cash gives them a relative monetary advantage over a buyer with a mortgage now facing higher interest rates. The future is uncertain, and all the data in the world can’t tell us what’s coming next.