Nothing About This Housing Market Makes Sense

This is the strangest housing market I have ever seen. Interest rates are climbing, rents have been falling for four straight years in major Sunbelt markets, home prices are holding stubbornly steady, and builders are struggling to find buyers. All of these forces are happening simultaneously, and many of them contradict each other. In this video I am breaking down exactly why this market is so unusual and laying out the three most likely paths forward from here.

Start with the 10-year Treasury. It is now higher than it has been in 19 years, stretching back to 2007. Inflation, exacerbated by the war in Iran, is pushing yields up, and the 10-year Treasury is the primary driver of mortgage rates. Combine stubbornly high home prices with rates at these levels and monthly mortgage payments become genuinely unaffordable for most buyers.

Meanwhile, the rental side is telling a completely different story. Looking at CoStar data for Phoenix, rent growth peaked at roughly 15% annually in the third quarter of 2021. Then it collapsed. Phoenix has experienced negative rent growth for four consecutive years beginning in early 2023, which is remarkable given that inflation alone normally keeps rent growth positive. The cause was not weak demand. Absorption stayed strong as Phoenix, Dallas Fort Worth, and Charlotte continued growing. The problem was supply. Cheap money in 2020 through 2022 triggered a building wave, and all those units delivered at once.

That dynamic is now reversing. Absorption has overtaken deliveries, vacancy is declining, and rent growth is forecast to turn positive. With construction costs elevated, the new apartment pipeline is thin. The likely outcome is a swing from oversupply to undersupply, which historically pushes rents higher.

Here are the three paths forward.

Path one: rates keep climbing on higher inflation. Building costs rise, rents rise, but cap rates rise too, which actually lowers apartment values. Mortgages get more expensive, the single family market slows further, and motivated sellers start accepting meaningful price reductions.

Path two: rates come down slowly and deliberately. Home prices stay roughly stable, the slow building pace persists, and rents return to normal 2 to 4% annual growth. This is the most stable outcome with the least disruption.

Path three: high rates break something. Companies face higher borrowing costs, and much of the current AI infrastructure buildout is debt financed. A recession would flatten rents as the job market softens. But recessions typically push interest rates down as capital flows into bonds, which lowers cap rates and makes homes affordable again. And because the government almost always responds with stimulus and money printing, the long term result is usually rebound inflation and higher asset prices a decade out.

I genuinely do not know which path we are on, which is exactly why staying diversified matters. If you can stay solvent and avoid being forced to sell at the bottom, even recessions become wealth building opportunities.

Leave a comment with which path you think we are on. And please like and subscribe, it helps the channel more than you know.

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