How the US Economy Affects Real Estate

The US economy has undergone recent shifts, and the Fed’s projected actions for 2025 have changed the outlook for the real estate industry. For these reasons, now is the right time to take a close look at commercial real estate and take advantage of new opportunities.

The shifting and complex US economy

The US economy is facing substantial headwinds. While economists expected a modest 0.4 percent growth in the first quarter of 2025, the Commerce Department reported that the GDP is currently at an annualized rate of -0.3 percent. 

The stock market has been a rollercoaster, plummeting into correction territory more than once. While the US stock market index has recovered some ground from its most recent lows, it remains sharply down overall.

Indeed, there’s reason to believe investors have started to pull their investments out of America and look for opportunities elsewhere. When stocks tumble, investors typically turn to US Treasury yields as a safe harbor, but not this time. Spiking Treasury yields have been a red flag that many have lost confidence in the US government and the US dollar.

Weak numbers like these have triggered predictions of a serious economic downturn in the US and worldwide. 

Causes of the sudden economic downturn

Many factors play a role in this sudden reversal of the US economy. In particular, the new administration’s institution of tariffs, at 10 percent worldwide and 145 percent on China until July 8, when even higher tariffs will resume, are complicating manufacturing and preventing businesses from planning. They also risk raising prices on Americans and driving small companies out of business.

For this reason, consumer sentiment has dropped precipitously from 74.00 on New Year’s Eve to 52.20 today. In general, Americans don’t like their future financial prospects this year. They may curtail their spending, leading to further strain on businesses.

That said, some promising signs indicate the US economy’s resilience. One recent bright spot was the number of jobs added to the economy in April — 177,000, which was slower than March but still surprisingly robust. In addition, unemployment has been holding steady at 4.2 percent. Finally, inflation currently appears under control, posting at 2.8 percent in March, down from 3.1 percent in February.

Given these dynamics, the Fed finds itself in a complicated situation regarding interest rates, which play a crucial role in the real estate industry.

Interest rates in 2025

As real estate investors already know, changes to the interest rate significantly impact the affordability of mortgages. The cheaper it is to borrow money, the higher the demand for mortgages is; the more expensive it is, the lower the demand.

When the economy began to improve in 2024, the Fed slowly began to ease interest rates from its high of 5.25 to 5.50 percent, decreasing the interest rate in steps to where it remains today: between 4.25 and 4.5 percent. The Fed has held this level since December 18, 2024.

In 2024, many experts expected the Fed to continue to lower interest rates at every meeting this year. However, the current climate of economic uncertainty has put that trajectory on pause. How long the delay will last depends on whether inflation roars back to life. Notably, the CME Group’s FedWatch tool currently expects no change at the Fed’s June 18 meeting and gives a 54.7 percent likelihood of the rate dropping into the 4 to 4.25 percent zone at the Fed’s July 30 meeting.

These economic trends have affected the real estate market in significant ways.

Predictions for the real estate market in 2025

First and foremost, the volatility in the stock markets and threats of runaway inflation have encouraged many investors to explore alternative investment options. Many have diversified their portfolios by getting into real estate since this sector has performed better than inflation on average for decades. Real estate is also associated with rising cash flows as rents increase, increasing property values, and accumulating equity.

That said, housing demand will likely differ based on the specific real estate market. Realtor.com recently released its report of the hottest housing markets for the coming year, identifying affordable metro areas in the Midwest — Toledo, OH; Rockford, IL; and Milwaukee, WI, for example — as prime places to invest in 2025.

In addition, employment shifts shape housing demand in different market segments. Traditionally, increases in employment have been associated with increased housing demand. While this axiom remains true, today’s professionals who work remotely can choose less expensive housing markets instead of remaining yoked to cities where headquarters are located.

Those without massive capital reserves or the desire to vet, purchase, and maintain whole properties by themselves have turned to Real Estate Investment Trusts (REITS) and other ways to enter this market. According to The Motley Fool’s analysis, this approach is wise since “REITs have outperformed the S&P 500 over the past 20-, 25-, and 50-year periods. REITs also outperformed stocks in the most recent full year of available data (2021)… The overall data shows that REITs have outperformed stocks over the long term.”

In addition, many real estate investors and REIT managers have concentrated on acquisitions that permit strategic value addition. For instance, certain apartment buildings and assisted living facilities can be upcycled to appeal to prospective residents with cost-effective interior design. Other profitable real estate investments have been found in unexpected areas like farmland. 

Position yourself to best meet your goals

The US economy will never stop changing, so keeping abreast of these developments will continue to be essential for any real estate investor. By tuning in to the latest shifts and understanding how they will likely affect these markets, savvy investors can position themselves to achieve their goals best.