With mortgage rates staying stubbornly high, even after the Fed cut rates starting in September 2024, it's time to start worrying about the housing market again. Housing affordability is at an all-time low and prices could easily start declining again.
That said, demand is still relatively strong from trade-up buyers and institutional investors. A lot of potential homebuyers have been holding off since the Fed started hiking rates in 2022. In addition, the economy continues to remain resilient while the S&P 500 closed up 23% in 2024 and up again in 2025. With the Fed expected to continue cutting rates through 2026, the hope is that mortgage rates finally decline and help boost demand.
Whatever the situation, if you plan to buy a house, you should also think about what could go wrong. If you buy real estate near the top of the market, you could be sitting ugly for years. This way, you won't get blindsided in case things do.
Think about all the people who bought real estate in 2007 and early 2008. Things were going wonderful, then the global financial crisis hit! If they had to sell before 2012, they likely lost money.
The same thing goes for some homebuyers in hot markets like Austin and Boise who bought in 2021/2022. Unfortunately, 1Q 2022 was the peak of the latest real estate boom, and now prices are off by double digits.
My Background
I've been investing in real estate since 2003 and own a $10+ million rental property portfolio. I've put in several lowball offers and have had them accepted. In addition, I have a $1 million portfolio in private real estate funds.
My favorite private real estate platform is Fundrise, where I have over $400,000 invested with them. Fundrise primarily invests in the Sunbelt region where valuations are low and yields tend to be higher. I've invested in private real estate funds and individual deals since 2016.
My Views On The Housing Market Today
For the record, I don't think the housing market will collapse like it did from 2006-2010. The millennial generation is in full buying mode and Gen Z is now starting to consider buying their first homes in 2025. Meanwhile, foreigners are likely going to flood the U.S. real estate market again after two-to-three years of being shut out.
The median home price in America could decline by 2% – 5% in 2025 due to affordability issues. At the same time, I could also see the median home price in America increase by up to 5% in 2025 given pent-up demand, declining mortgage rates, and a strong economy. Here are the 2025 housing price predictions by industry analysts, almost all of which are bullish.
But like any good investor, it's good to see the other side of the story. The rate of price appreciation for the housing market will likely cool over the next 12 months.
Let me review all the concerns to provide prospective homebuyers a more balanced outlook. This way, homebuyers will be less surprised by a negative outcome and more aggressive in trying to negotiate a deal.
Commercial real estate has been in a deep slump since 2022. However, the recession seems to be ending and there should be a rebound in 2026 and beyond. There was minimal new construction from 2022-2025 due to high interest rates, which means an eventual undersupply in 2026 and beyond.
A Slowdown In Housing Is Inevitable
The pace of house price growth will slow because it cannot outpace income growth by such a wide margin for too long. It's the same concept as trees not growing to the sky forever. Eventually, demand will falter and people will prefer renting.
This pace of double-digit price appreciation in the housing market was unsustainable in 2020, 2021, and 2022. We're now seeing more normalized growth of between -5% to +5%, depending on where you live.
Let's go over some more details on why the housing market has some signs of concerns. With such concerns, you may want to invest in a publicly-traded REIT or a private eREIT from Fundrise, instead of buying a single asset with a large mortgage. Diversification is key in this hot market.
Taking on massive debt to buy real estate at record highs is risky. You need to be sure you're following my 30/30/3 home buying rule before proceeding. If you follow my rule, you will significantly increase your chances of being able to comfortable afford your home.
Let's say you lose 50% on your stock and bond portfolio. You'll be upset, but be fine. If your property loses 20% of its value, however, this means you've lost 100% of your 20% downpayment.
Below is the latest U.S. house growth chart from January 1976 to June 2021. According to the Freddie Mac House Price Index, house price growth is at an all-time high. Noice the previous all-time high house price growth in the late 1970s and in 2006.
If you are buying property today, you need to be prepared for a potential deceleration in prices if not downright decline. Therefore, you must buy property strategically if you do buy. This means NOT taking on too much mortgage debt.
In this scenario, you'll also probably still be fine – if you don't have to sell. But when property prices correct by 20% or more, many people become forced sellers because they've also lost their jobs.
I understand that millennials are coming of buying age and inventory is on the decline, making competition for buying a home fierce. However, only if you are fully cognizant of the following points I've highlighted below should you proceed with a property purchase today.
Things To Know Before Buying Property Today
Before you buy one of the biggest assets in your life, it's good to know the current market condition. It's also good to know what could go wrong in the housing market.
1) Rents are softening
Given property prices are a function of rental income multiples, a real estate buyer should be looking to buy at similar pricing discounts from peak rental periods.
Rents softened in major cities such as New York City, San Francisco, Seattle, and DC due to the pandemic. However, I anticipate rents to rebound once we achieve herd immunity. But they may not as people scatter to lower cost areas of the country.
Pay very careful attention to the latest monthly rental figures before buying property. Home prices and rents started growing in unison in 2021, but rents started declining in 4Q2022. Rents are still declining or flatlining in 2025
2) Mortgage industry is still very tight
Here's what's going on in the mortgage industry, which is as stringent as it has ever been. Only people with 720+ credit scores and 20% downpayment have been able to get a mortgage. This is good in that a fallout is less likely in the future. But let's talk about some concerns.
Liquidity (Profitability) Concerns: A growing percentage of people are not paying their mortgages and banks are uncertain if and when payments will resume. As a result, his bank is only lending to the most financially fit customers.
Stricter Lending Standards: Due to liquidity (profitability) concerns, banks have significantly tightened lending standards. Here are some of the increased lending standards he mentioned to me back in 2020:
- Temporarily stopped allowing for cash-out refinances
- No longer fully counting RSU values when calculating how much a person can borrow
- Schedule E income (rental income) when calculating how much a person can borrow is no longer included
- No longer approving Home Equity Lines Of Credit (HELOC)
- Minimum downpayment is 20%
- Raised minimum credit score to qualify for a mortgage to 680
In other words, lending standards are as strict as it gets. As a result, perhaps there is upside to real estate liquidity if there is a reversion to pre-pandemic level standards sooner. But if lending standards continue to tighten, it may squeeze out the marginal buyer in the short-term.
3) Mortgage rates remain stubbornly high
Mortgage rates hit record lows in 2020. Now, mortgage rates are near 17-year highs thanks to an aggressive Fed and stubbornly high inflation.
My last mortgage refinance was in 4Q2019 when I locked in a 7/1 ARM jumbo ARM at 2.626%. I was pumped! However, today, that same rate is closer to 4.75% with the average 30-year fixed-rate mortgage at about 7%.
Stubbornly high mortgage rates in 2025 is the biggest reason to worry about the housing market again. Higher mortgage rates WILL slow down the housing market, which is why you shouldn't get into crazy bidding wars. Instead, we should try to look for stale listings and deals.
The housing market is currently frozen with sellers unwilling to sell and buyers unwilling to buy. The vast majority of homeowners have mortgage rates below 6%. They don't want to give up their low mortgage rates and buy a home with much higher mortgage rates.
4) Prices have surpassed their previous peaks in many cities
While every city is different, if you look at the prices in Denver and Dallas, you'll find that the prices are roughly 45% higher than they were in 2006-2007. Meanwhile, hot cities like Seattle and Portland are only about 20% above previous peaks.
The US median existing home price is about 40% higher than its previous peak in 2007. We're talking about a median existing home price from $250,000 in 2007 to $430,000 today. That's significant. But then again, 16 years have passed. As a real estate investor, your goal is to invest in markets that have both underperformed and have the potential to catch up.
I would be surgically investing in heartland real estate through Fundrise, my favorite real estate investing platform. You can dollar cost average for just $10. Fundrise specializes in single-family and multi-family properties in the heartland, where valuations are cheaper and yields are higher. The firm started in 2012 and has over 350,000 investors and $3 billion in assets under management.
5) Tax reform takes time to negatively impact housing prices.
Conceptually, we all know that limiting state income and property tax deductions to $10,000 and limiting mortgage interest deductions on new mortgages up to $750,000 are net negatives for expensive coastal city real estate markets. However, it takes 1-2 years to start feeling the crunch of tax reform.
Think about it. Let's say you own an average 3 bedroom, 3 bathroom home for $1.5 million. Your property taxes alone cost $17,000 – $20,000 a year, depending on which state you reside.
Let's say you earn $120,000 a year. You'll have paid $6,000+ in state income taxes. In the past, you could have deducted the entire $23,000 – $26,000 from your income. Now, you are limited to $10,000 in deductions.
Some will argue that lower income taxes will offset these deduction limitations. Perhaps.
Given the government is in a deficit, higher taxes or cuts to resources are an inevitability. Tax reform is a headwind, not a tailwind for coastal city property price appreciation.
Thankfully, The One Big Beautiful Bill Act passed on July 4, 2025, and the SALT cap deduction increases from $10,000 to $40,000. That is fantastic for real estate, especially expensive coastal city real estate.
6) Inventory is creeping higher
The construction boom we've experienced over the past several years is finally showing up in the data as a wave of new inventory hits the market. When there's more inventory, pricing comes under pressure if demand doesn't follow. Below is the latest housing inventory under construction and authorized, but not started.
Here's another latest housing inventory chart by Altos Research. Housing inventory is still way below normal. However, it's good to keep an eye on inventory given prices are also much higher. An explosion in housing inventory is one of the main reasons to worry about the housing market again.
For some of the hottest cities for real estate, like Austin and Nashville, inventory is definitely creeping higher. If inventory gets too high, these heartland cities are at risk of a housing downturn. Take a look at this chart below that shows single-family permits way up for Austin, Dallas, and Nashville.
Personally, I wouldn't be investing in cities in the top-right quadrant. Instead, I would be investing in cities in the green, lower-right quadrant. You don't really want to invest in markets where home prices rose the most while also facing the most amount of increasing supply.
At the same time, due to high interest rates in 2022 through 2024, home builders have slowed way down during this time period. Therefore, you can expect to see a growing housing shortage by the end of 2025 or 2026.
7) It takes a while to recognize a peak.
The housing boom that began in January 1996 ended in March 2006. But it wasn't until the beginning of 2008 that people started to accept that the housing market had already peaked.
Until 2008, property investors were still clinging to hope or at least were in denial that prices would no longer be going up. Once Bear Sterns was sold for nothing to JP Morgan in March 2008, people started to panic.
Then Lehman Brothers went under on September 15, 2008, a full two and a half years after the housing market peaked. And things got even worse, with the S&P 500 finally bottoming out on March 9, 2009. At least as of 3Q2020, we already experienced an aggressive 32% decline in the S&P 500 in March 2020.
Below is a great chart that shows how badly housing prices corrected in some of our major cities. Notice how the previous boom lasted 10 years and the crash lasted 5 years. Therefore, 2021 could be the peak in the current housing boom. In fact, it probably is as I sit here revising this post in 2023.
8) The stock market has crashed multiple times
We saw a violent 20% sell down in the S&P 500 in 4Q2018. Then we saw a 32% decline from peak-to-trough in the S&P 500 by March 23, 2020. The S&P 500 and the NASDAQ corrected by 13% and 20%, respectively in 2022 already. As a result, investors need to watch out.
From policy errors by the Fed, to trade wars, to slowing global growth, to a potential war with Iran, to COVID-19, to a global pandemic, companies everywhere will be more cautious on their spending in 2022 and beyond.
Just know that prices tend to revert back to the mean or overshoot on the downside very 4 – 10 years. Real estate takes 2-5 years to correct, so there is no rush to buy now.
The S&P 500 corrected by 19% in 2022 and went into bear market territory. The NASDAQ declined by 33% in 2022. As a result, a lot of funny money stock market wealth evaporated. Real estate significantly outperformed stocks in 2022.
Despite stocks near all-time highs today, stocks could easily correct once more with the S&P 500 trading at about 23X forward earnings versus 18X historical.
9) Housing affordability as near an all-time low
Below is a great chart that shows how mortgage payment to income ratio is at a 23-year high. This means housing affordability is at an all-time low. Either mortgage rates have to decline or real estate prices have to decline.
Recognizing Signs Of Housing Market Strength
Although it's good to worry about the housing market again, let us also recognize reasons for some housing market strength.
- Negative real mortgage rates for most still given the vast majority of homeowners refinanced already and are locked in.
- The S&P 500 closed up 24% in 2023 and 23% in 2024, creating enormous wealth for stock investors.
- A rotation out of volatile stocks into more stable real estate.
- Still not enough inventory with estimates of a 2 million annual under-supply of homes.
- The increased desire for income / yield.
- Demand from institutional real estate investors competing against retail investors..
- Foreign buyers will likely come back to the United States with over $200 billion in pent-up demand
- Massive home equity accumulation since 2020 alone, which will buffer downside risk risk.
Buy Real Estate Responsibly
The mass media and the real estate industry will focus on mortgage rates, demographic shifts, and institutional demand.
That's fine if you can surgically buy in strong job cities via real estate crowdfunding. The heartland of America is an especially attractive area to buy. Valuations are much cheaper and net rental yields are much higher. There should be a multi-decade trend of spreading out across America thanks to technology.
However, there are more deals to be had in expensive coastal cities like New York and San Francisco as well. Big cities are making a strong comeback and have lagged the overall U.S. real estate market during the pandemic.
If you're dying to buy a primary residence today, make sure you can withstand a 10-20% correction over a five year time frame. It's always good to plan conservatively. I don't think the housing market will crash in the next three years. But prices should remain weak in 2023.
If you don't have a financial buffer equal to at least 10% of the value of your property after putting down 20%+, then you are not financially prepared for a downturn. You need to try and buy at a price that is at least 5% lower than the previous comparable sale price.
Too much debt is really what will kill you if we ever return to hard times. Buy a house to enjoy life instead of looking to make a profit. As soon as you start hearing regular reports about people putting no money down, then it will be really time to worry about the housing market. But for now, real estate is likely going to continue to outperform equities.
Build Wealth Strategically Through Real Estate
Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income. Stocks are fine, but stock yields are low and stocks are much more volatile.
Investing in real estate crowdfunding is a solution for diversity and exposure. Instead of taking on a mortgage to buy real estate, you can simply invest in a diversified private real estate funds through a firm like Fundrise. If you don't have the down payment or want to deal with tenants, investing through Fundrise is a hassle-free way to make passive income.
I've personally invested over $1 million in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. Home prices in some areas are off between 5% – 15% from their pandemic peaks. I think it's good to leg in now.
My real estate investments account for roughly 50% of my current passive income of ~$360,000. To be able to earn income 100% passively as I take care of my two young children is a dream come true.
It's Time To Start Worrying About The Housing Market Again is a FS original post. I've been a real estate investor since 2003 and own multiple properties today. Stay alert and bargain hard!