Bill McBride, author of the economics blog Calculated Risk, said there’s a key reason why both rent and home price growth is slowing amid the U.S. housing correction playing out today.

In a live Twitter Space hosted by Fortune Magazine on Friday, McBride called it the most “underreported” factor.

What is it? Household formation — both because of how much it accelerated amid the COVID-19 pandemic and how it’s slowing down now.

Last year, the “boom in house prices made sense for a number of reasons,” he said, given so many millennials were aging into home buying age. “But what was surprising was the rapid increase in rents at the same time, which implies that we’re getting demand for both home buying and for renting.”

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It was a head-scratcher that McBride called the “household mystery” in a series of blog posts. In one posted in May, McBride cited a paper by researchers at the Federal Reserve Bank of San Francisco and another by Federal Reserve economists drawing a parallel from the rise in popularity of remote work amid the pandemic and a dramatic rebound in household formation shortly after an initial shock from when COVID-19 first hit the U.S.

While Census Bureau data shows the number of households initially decreased in 2020, McBride wrote it also shows the number of households increased sharply in 2021, and the number of people per household decreased.

“Was this a one-time surge in household formation as the pandemic eased? Or will we see further increases in household formation even with little population growth (perhaps due to more work-from-home)? This is a key question for housing,” McBride wrote. “My suspicion is household formation will slow significantly, taking pressure off of demand.”

Recently, the Federal Reserve Bank of San Francisco published an economic letter titled “Remote Work and Housing Demand,” which showed remote work drove over 60% of the U.S. housing market’s home price surge. That study “really helped understand what happened,” McBride said.

While rent and home prices are still way up compared to 2019 levels, price growth is slowing and starting to dip as the Federal Reserve’s fight with inflation takes its toll and mortgage rates now hover around 7%.

During the pandemic’s housing frenzy, rising home prices also pressurized the rental market, squeezing renters and first-time homebuyers as prices reached record heights. But now, as higher mortgage rates temper demand for home buying, McBride doesn’t think that will translate to even more pressure on the rental market.

“With household formation low, I don’t think that’s going to happen,” he said.

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Now, as the dust settles from the pandemic, “what we’re seeing is household formation is really slowing down dramatically,” McBride said.

“That’s completely because we had this huge surge in household formation primarily due to work from home,” McBride said. “That’s why rents aren’t booming more with high mortgage rates. As a matter of fact, everything’s cooling because household formation is cooling.”

However, while the rise of work-from-home was a “big driver,” McBride added he doesn’t think that’s “going to reverse. I’m not saying that.”

“But what we’re seeing is rent growth is slowing and slowing pretty sharply,” he said.

That slowdown in household formation, combined with high mortgage rates compound the impacts on demand for housing, which could help explain how quickly and sharply home prices are starting to correct, especially in housing markets in the West that became ground zero for the pandemic housing frenzy. Those include Boise, Idaho; Austin, Texas; and Salt Lake City, Utah.

Meanwhile, McBride noted a record number of housing units are under construction and slated to come online next year, which could also have big implications on supply versus demand.

“So we’re going to see some dynamics that are very unusual,” he said. “We’re going to see a slowdown in both house buying and in apartment renting.”

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