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Rampant Inflation, Rising Interest Rates: Dangers & Opportunities Ahead For Residential Real Estate

Is the heady real estate market in for a hard landing? After two years of stratospheric growth in home prices, raging inflation and resultant monetary tightening have stakeholders throughout the real estate ecosystem trying to read the tea leaves. A turbulent stock market and fresh recession fears don’t help.  

On the one hand, real estate has always been a hedge against inflation when equities and other investment classes have a hard time keeping up. Rising property values and steeper rents are a boon to most everyone in the sector, with the exceptions being renters and would-be homebuyers, of course. 

On the flip side, however, the unprecedented times in which we live just keep growing more so. For nearly half a century, cheap money has helped to power economic growth—including the real estate market. But there are signs that the pandemic that changed everything may end up disrupting more than we fully realize. Here’s a look at a few key factors to consider when making your next real estate move.

Key Takeaways

  • Raging inflation and surging interest rates are roiling the residential sector, but fundamentals remain intact
  • The Fed’s efforts to stem inflation will escalate even amid fears of recession if its latest rate hikes fail to turn the tide
  • Home prices remain strong, but momentum may be slowing or even dropping in some markets further away from urban cores
  • While the rate hike has led to less affordability for buying a house and may lead to near-term increases in rent prices, a recession could force ibuyers, lenders, investors, SFRs and others to re-work strategies
  • Look for a growing number of them to source property intelligence solutions that help them quickly identify the best opportunities and avoid less desirable properties and those requiring costly repairs

Inflation Fight is Slamming the Brakes on Residential

By now, it’s clear that high levels of federal spending in the face of COVID-19 worked better than anyone hoped. Economic calamity was averted even as an era of remote working saw Americans move to larger digs for more elbow room outside of major metro areas—fueling higher home prices along the way. Combined with supply chains derailed by the pandemic, too little supply in other sectors of the economy has collided with too much demand—pushing the inflation rate to 9.1% in June. 

To tamp that down, the Federal Reserve has increased interest rates sharply in recent months, including those back-to-back 75-basis point hikes in June and July, with another hike expected in September. At this writing, there are signs these steps are starting to work. But together with wobbling financial markets, the chances of a recession in the year ahead still range somewhere between 40% and fait accompli. 

Recession generally puts downward pressure on home prices (as well as rents), of course—tempering or even submerging investments, and potentially cratering loan payments. SFRs could face turmoil. And iBuyers and others could find it harder to flip homes even as the costs of renovations continue to rise. 

But these may be the least of the challenges ahead. 

The Fed Isn’t Coming to the Rescue 

During your average, run-of-the-mill recessionary period, the US Central Bank can loosen monetary policy to grease the wheels of the economy. And therein lies the unique challenge of our day. Sure, an average recession in 2021 would have been tough enough when there wasn’t much room to cut already low rates. But with inflation now roaring, that blunt-but-effective tool may be off the table all together. And that’s already rippling through the sector. 

After hitting 2.6% in January of 2021, 30-year-fixed-rate mortgages have been a moving target, hitting 5.8% in June and more recently bobbing between 4.99% and 5.22%. That means the average monthly mortgage payment is still nearly 50% (47%) higher than it was a year ago. So far, this has led to the worst affordability levels in more than a decade, pushing average monthly mortgage payments to 24.3% of household income (and as high as 37% of household income for first-time buyers).. 

Much further, and the economics of homeownership get questionable for everyday consumers. That doesn’t just discourage buyers; it keeps people stuck in the homes they have, reducing available inventories.  

While there are hopeful signs, it could get worse. As Former Treasury Secretary Larry Summers put it recently, it could take 5% unemployment for five straight years to curb inflation. Mortgage payments are now higher than rent in 45 of the 50 largest US metros—up from 22 as recently as 2019.

You’d Better Have Fundamentals in Focus

It remains to be seen how things play out, of course. Should economic conditions deteriorate too far, too fast, the Fed (and inflation) can reverse course. But even in the best case, the potential for damage is material. 

In an environment like this, fundamentals matter. Historically, the further away from core metro areas, for instance, the steeper the possible price declines in the event of a downturn. Some markets have seen a 5% to 10% drop in home prices already. Even a short recession or period of heightened unemployment could shift the center of gravity back toward larger pools of job opportunities to be found in urban centers and their immediate surroundings. So can employer demands for increased in-office work schedules as pandemic fears abate. 

Thanks to banking reforms, we’re less likely to see as many foreclosures as we did during the housing crisis a decade ago. But that will also serve to keep inventories comparatively low over the near term. The ability to make faster, data-driven buy and sell decisions on properties that do hit the market will be key. That means property condition should be one of the most important considerations to take into account in transaction decisions. 

Accurate, Up-to-Date Property Data Will Be Crucial

It remains to be seen how things play out, of course. For many players in the residential sector, broker price opinions (BPOs) and appraisals have become too costly and time-consuming for a marketplace that may demand split-second decisions. And even sophisticated automated valuation models (AVMs) miss critical details such as property condition and hyper-local geographic effects that impact financial decisions. As a result, look for a growing number of investors, portfolio managers, lenders, and others to source solutions that can help them quickly identify the best opportunities and avoid properties requiring costly repairs.

Today’s most robust options leverage high-res aerial imagery and geospatial analytics to deliver real-time property condition data on more than 100 million unique properties nationwide, instantly, on-demand via API. Accurate, up-to-date property intelligence is highly valuable in the best of real estate markets—and is likely to prove essential to avoiding financial catastrophe in a suddenly uncertain market. 


To learn more about how access to instant, accurate property condition, characteristic, and location data can provide a competitive advantage in any real estate environment, contact the experts at CAPE Analytics.