Real estate has long been a “safe” investment option. People from various sections of society consider it as part of their portfolio. The investment seems tangible, and the chances of good returns are high. However, the last few years have been unsteady for the real estate market globally, including the US. How do things look this year?
Broadly, the US housing market has seen some growth. Forbes reports that home prices increased by 3.9% as of December 2024. That said, the conditions are far from consistent across the country. Let us discuss the real estate investment scenario in 2025. It will help you make an informed decision to grow your wealth.
Supply Concerns Demand Flexible Investments
At present, supply issues prevail in the US housing market. The for-sale inventory remains lower than the demand. Further, many homeowners are worried about being exposed to high mortgage rates. Market reports indicate that mortgage rates may not reduce much this year, staying around 6.7% by the year’s end.
US President Donald Trump has indicated an interest in building a balanced housing market. There have been talks about increasing the supply of real estate. However, there have been more talks about tariffs. CNBC reports that lumber, gypsum, and home appliances may be the most impacted due to tariffs imposed on Canada, Mexico, and China.
The implementation of these tariffs will affect the construction sector. Lumber cost increase might amount to an average of $4,900 per home. Unsurprisingly, this scenario has affected builder confidence.
Amid this unpredictable supply, investors should be more flexible about their chosen location. For example, the right property may be available farther away from a spot you had previously shortlisted. It is worth considering if other parameters, like property size, seem favorable for you.
Diversifying the Loan Landscape
Tax benefits are a prime impetus for real estate investors. The advantage can be significant enough to warrant taking out loans for a property you’ve eyed for a while.
Still, investors must be careful since some reports suggest an impending commercial real estate crisis. According to Harvard Business Review, the next two years will see almost $1 trillion of real estate loans (commercial) come due. If these loans go awry, several banks may fail simultaneously, causing a financial crisis. Many banks in America are overexposed to this scenario.
It is likely the problem is not limited to large banks and financial institutions. Larger banks face more regulatory scrutiny, which can explain why they report more underperforming loans. At the same time, smaller institutions may extend the maturity periods in hopes that the market will recover soon.
In these circumstances, investors should consider diversifying their financing options. Limiting reliance on banks is also feasible for those with low credit scores who wish to avoid the hassle of background checks.
According to Source Capital, alternate loans can support commercial property investments like office spaces and storefronts. Typically, investors must meet the loan-to-value (LTV) ratio to qualify for hard money loans.
Investing in a World Affected by Climate Change
Yet another consideration for real estate investment is the rising impact of climate change. The US housing market has witnessed substantial damage due to rising wildfires and natural calamities like Hurricane Helene.
The United Nations notes that real estate emits 40% of the total GHGs or greenhouse gas emissions. Consequently, the sector also faces serious challenges amid the urgency to decarbonize. For example, real estate investors may face high transition risks and public pressure to introduce greater sustainability. They may also experience stricter regulation.
Investing in sustainable real estate can be a sensible proposition for investors. It might be the only viable plan to handle rising pressure to minimize greenhouse gas emissions. The World Economic Forum recommends decarbonization in real estate for future-proofing and climate adaptation. Moves like retrofitting and phasing out aging grids will soon not be choices but essential.
An associated concern is rising insurance costs in the sector. More climate change risks imply a higher insurance premium. Many commercial buildings have seen a significant rise in insurance costs due to their exposure to natural hazards.
As a responsible investor, you can take proactive measures, like installing flood monitors and fire prevention tools in your properties. Periodic risk assessments can protect your estate from succumbing to adverse natural events. They are a practical approach to safeguarding your investment.
More investors are open to relocating to safer locations to avoid natural disasters. Deloitte recommends this route for location-agnostic individuals who can afford to follow a peril map and act accordingly. Besides giving you some mental peace, it can also lower insurance payments.
Final Word
The present situation suggests that the US real estate market faces several concerns, from supply shortages to natural calamities and rising insurance costs. The banking sector, closely linked to real estate, is also precarious. Investors should be cautious when proceeding with substantial investments at this time.
Ultimately, property investments are a personal decision, whether you’re eying commercial or residential spaces. The time may be right if you are confident about your investment, current debt situation, and long-term personal and business goals.
