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Stagflation and Real Estate: Why Smart Investors Should Be Watching the Economic Storm Ahead
If you’re a real estate investor, it’s time to pay close attention to one word that’s making a troubling comeback: stagflation.
As inflation surges and economic growth slows, experts warn that the U.S. may be heading into a prolonged period of stagflation—a dangerous cocktail of high inflation, rising unemployment, and stagnant GDP growth. And the real estate sector won’t be spared.
What Is Stagflation, and Why Should Real Estate Investors Care?
Stagflation is the economic version of being stuck between a rock and a hard place. When inflation rises in a weak economy, central banks like the Federal Reserve face impossible choices: raise interest rates and kill growth, or lower rates and fuel even more inflation.
For real estate, this means one thing: uncertainty. Rising borrowing costs can stall the housing market, while inflation can push construction expenses through the roof. At the same time, softening job markets limit tenants’ and buyers’ ability to pay.
The Tariff Trigger: Are We Already on the Path?
According to former Federal Reserve President Bill Dudley, the current administration’s aggressive trade policy—particularly tariffs—could act as the spark. In a Bloomberg op-ed, Dudley warned that tariffs on imports could lead to 5% inflation and weakened demand for U.S. goods. In the housing sector, that translates into higher costs for materials and a potential dip in consumer confidence.
President Trump’s decision to temporarily suspend some tariffs hasn’t calmed markets. A 125% tariff on China remains in place, keeping pressure on construction and consumer goods.
“The Optimistic Scenario” Might Be the Worst One
Dudley ominously referred to stagflation as the “optimistic” outcome. A full-blown recession with persistent inflation could be even more damaging. The real estate market—already facing affordability issues—would be caught in the crosshairs.
Should the Fed raise rates to cool inflation, mortgage interest rates could climb, pricing out buyers and increasing cap rates for investors. On the flip side, lowering rates could fuel asset bubbles, further distorting housing affordability.
How Stagflation Impacts Each Real Estate Sector
Construction: Material costs are soaring. A typical home could cost $9,000+ more to build due to tariffs on Canadian lumber and Mexican gypsum. Builders and flippers alike will face thinner margins or risk pricing themselves out of the market.
Landlords: Rental demand may remain steady, but affordability becomes an issue. Expect higher turnover, more payment plans, and greater demand for lower-income or subsidized housing—just as HUD funding is at risk.
Agents and Brokers: Fewer sales mean fewer commissions. A sluggish economy discourages buying, and those locked into low-rate mortgages are unlikely to list, creating a supply drought.
Mortgage Professionals: Rising rates and falling volume equals tough times. Stagflation creates a tough lending environment with limited refinance opportunities and stricter borrower qualifications.
Rate Cuts Won’t Save You This Time
While many real estate investors look to interest rate cuts as a silver bullet, Federal Reserve Chair Jerome Powell isn’t showing signs of immediate action. President Trump may be pressuring the Fed to cut, but Powell is treading carefully.
As Ruchir Sharma (Rockefeller International) and Larry Fink (BlackRock) both noted, rate cuts could be dangerous. Inflation isn’t “transitory” anymore, and reacting too fast could make things worse.
What Should Investors Do Now?
- Stress-test your deals for higher interest rates and lower rent growth.
- Refocus on affordable housing and secondary markets with strong fundamentals.
- Build reserves—cash is king during economic uncertainty.
- Stay informed—policy shifts can be sudden and significant.
Final Thoughts: A Market Redefined by Policy
Stagflation may not be headline news yet, but real estate insiders are already preparing for its effects. From Wall Street titans like Jamie Dimon and Bill Ackman to analysts at NAR and BlackRock, the message is clear: the old rules don’t apply anymore.
This isn’t just another rate cycle. It’s a new era of policy-driven volatility—where tariffs, inflation, and politics collide. And in real estate, where long timelines and high capital outlays are the norm, understanding these risks could be the difference between surviving and thriving.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“
Stagflation and Real Estate: Why Smart Investors Should Be Watching the Economic Storm Ahead
Has the U.S. Housing Market Finally Begun to Thaw After the Pandemic?
It seems like the housing market might be showing signs of life. According to a recent report from Redfin, pending home sales in early October have seen their largest year-over-year rise since 2021, with a 2% increase in the four weeks ending October 6.
This news is likely to be welcomed by real estate investors who have felt the market has offered limited opportunities over the past few years. However, it’s important to take a cautious approach—one promising statistic doesn’t necessarily indicate a broader trend.
Is the Housing Market Truly Recovering?
Let’s explore the different factors at play.
Interest Rate Reductions: A Critical Factor or a Red Herring?
The Redfin report links the surge in pending sales to the Federal Reserve’s much-anticipated rate cut announcement in mid-September. According to Redfin, this announcement prompted buyers to re-enter the market in late September, despite mortgage rates having already been falling for weeks before the cut.
This psychological boost is crucial. Although buyers were aware of the falling rates beforehand, many seemed to be waiting for a formal signal to act. This could be attributed to a lingering fixation on the ultra-low rates of 3% to 4% that buyers enjoyed before 2022.
Any rate cut announcement serves as a nudge for prospective buyers, making them feel that now might be the right time to purchase, even if mortgage rates had been decreasing already. In an unstable mortgage market, such announcements hold significant influence.
However, mortgage rates are just one piece of the puzzle when analyzing housing market performance. As noted by Investopedia, the real estate market is driven by four primary factors: interest rates, demographics, economic conditions, and government policies.
Demographics: Shaping the Market
During the pandemic, demographic shifts had a profound effect on U.S. real estate, with major population movements like the Sunbelt migration fueling booms in cities such as Phoenix and Austin, which later became unaffordable for many.
Age is another key demographic factor, and the millennial generation’s pent-up demand continues to be a driving force behind the rise in home purchases. Despite the challenges of the past few years, millennials who have longed to become homeowners are now entering the market in greater numbers, as more properties become available.
Rising Inventory: A Sign of Stabilization
A key factor contributing to the market’s stabilization is the growth of housing inventory over the last year. The pandemic had a significant impact on the availability of homes, with sellers hesitant to list properties due to COVID-19 restrictions and, later, higher mortgage rates.
Some homeowners, particularly those upgrading to larger homes, found it financially challenging to sell and take on higher mortgages. Others, however, simply chose to wait for a more favorable market.
Although the latest Realtor.com report shows that inventory remains down by 23.2% compared to pre-pandemic levels, we are seeing an upward trend. For instance, new listings have been rising since last year, with a 5.7% year-over-year increase for the four weeks ending October 6.
As of September 2024, some states have even surpassed their pre-pandemic inventory levels, including Tennessee, Texas, and Idaho, with others, like Washington, close behind.
Vulnerabilities in Certain Regions
However, not all regions are showing positive signs. For example, some areas, particularly those affected by extreme weather, have seen inventory spikes not because of market recovery, but due to homeowners trying to offload damaged properties they can’t afford to repair.
For instance, regions like Florida and North Carolina, hit by hurricanes, have experienced increases in home listings, but these may reflect a response to climate-related challenges rather than market health.
Opportunities for Investors
Investors should be discerning when choosing markets, focusing on regions where inventory is growing due to increased home construction rather than climate-related distress. States like Idaho, Utah, North Carolina, and Texas, which are building new homes, offer potential, though caution is needed in areas prone to natural disasters.
The Midwest and Northeast, meanwhile, still face significant challenges in recovering to normal market conditions. These regions have lower rates of new construction, meaning inventory remains scarce, which could present both opportunities and difficulties for investors.
The Bottom Line
The U.S. housing market is showing signs of recovery, but the situation remains complex and varies by region. Interest rates play an essential role in unlocking the market, but investors should also consider other critical factors, such as homebuilding trends, climate risks, and government policies. While the market is heading in the right direction, it’s crucial to examine regional differences carefully before making investment decisions.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“