Fannie Mae predicts decreased year-over-year home price growth of 3.6% in 2025 compared to 2024’s 5.8%. That could be good news for housing affordability and overall inflation, but it’s still a tough market for real estate investors.
Past decisions and economic changes have fueled today’s market challenges. Builders pulled back on development during the Great Recession while the Federal Reserve lowered rates to energize the economy. At the same time, population growth increased housing demand. Then, we had post-COVID inflation. All of these factors came together to create the higher cost of housing we see today.
What does this mean for real estate investors? What strategies can help maximize returns in today’s market? This article covers current trends and how investors can position themselves for success.
What is housing inflation?
Housing inflation represents the increasing cost of housing over time. It includes all housing costs, which can mean higher purchase prices for buyers and larger homeownership expenses like property taxes. For renters, it means higher rental rates.
How housing inflation is measured
Data from three major indexes provides details on housing market inflation:
- Consumer Price Index (CPI): The Bureau of Labor Statistics collects prices each month for goods and services across 87 urban areas. This includes data on the housing sector focusing on rent and owners’ equivalent rent for those who own their property. These shelter inflation numbers represent over 30% of overall inflation.
- Personal Consumption Expenditures (PCE): This index also tracks goods, services, and housing prices. The Bureau of Economic Analysis collects this information from various sources to measure costs nationwide. Home price growth represents a smaller percentage of this overall index.
- Case-Schiller Home Price Index: This specific measure tracks housing prices of resale homes, so it doesn’t include new construction properties. The data comes from local county recorder’s offices and is publicly available via the St. Louis Federal Reserve’s website.
Housing inflation trends in 2025
After several years of post-COVID inflation that increased housing prices in all areas, including the home buying and rental market, this year’s trends remain moderate:
- Home price growth: CoreLogic reports that home prices rose 3.3% from January 2024 to January 2025 and expects growth of 3.6% for the same time period in the coming year. This steady increase maintains moderate market appreciation.
- Shelter inflation: The shelter inflation index increased by 0.3% in February 2025, continuing its downward trend from the historical peak in June 2022, when overall inflation was around 9.1%.
- Rental market: National rents are stable at about 0.9% year over year. This represents a slowdown compared to early 2022, when annual rent increases consistently rose about 10%.
- Housing supply: According to the Congressional Budget Office, the housing market can expect consistent demand growth, with an estimated 1.6 million new household formations per year over the next decade. Besides the housing gap from reduced housing starts, the “rate-lock effect” means fewer people selling their homes, which also reduces supply and creates an estimated 7% increase in home prices.
Key drivers of housing inflation
Some of the biggest factors driving inflation include:
| Factor | Description | Measurement |
| Supply and demand imbalance | Number of new housing relative to demand. | Housing starts, vacancy rates, and inventory. |
| Interest rates | Changes in interest rates set by the Federal Reserve. | Mortgage rates, lending rates, and home affordability indexes. |
| Construction costs | Cost of building materials, labor, and supply chain disruptions. | Construction cost indexes and price changes in housing. |
| Wage growth | The rate at which wages increase over time. | Average hourly earnings, employment cost index, and inflation-adjusted wages. |
| Regulations and zoning laws | Regulatory barriers affecting housing supply. | Permitting approvals and length, zoning restrictions, and environmental compliance costs. |
| Inflationary pressures | External economic factors influencing costs. | Inflation indexes, energy prices, and tariffs that impact housing expenses. |
- Supply and demand imbalance: Throughout the 2010s, builders added new homes or apartments at lower rates than in previous years. Although they’ve ramped up production now, if the home-buying space stays at the current pace, Realtor.com predicts it will take 7 years to meet the current demand. Meanwhile, multifamily starts in 2024 fell to 25%. All of this contributes to the rising cost of shelter prices.
- Interest rates: From March 2022 through the next 16 months, the United States Central Bank increased interest rates 11 times. These higher rates impact affordability for everyone, including builders and buyers.
- Construction costs: In the past five years, the cost of materials, labor, and supply chain disruptions have increased construction costs by over 20%. These costs get passed on to renters and buyers through price changes to various housing options.
- Wage growth: While workers are making more money and saw wage growth of 3.8% in the past year, the cumulative effect since 2020 does not outpace inflation.
- Regulations and zoning laws: State and local government regulations can create hurdles to new housing development. Local jurisdictions may have complicated environmental, legal, or approval requirements that keep supply constrained.
- Inflationary pressures: Other inflationary factors include government policies like tariffs and energy costs, which drive up expenses. Public concerns about inflation can sometimes create a self-fulfilling prophecy.
Impact of housing inflation on real estate investments
Increased housing prices change the math for investors:
Property values
Rising housing costs can increase property values and the overall appreciation of real estate investments. Current property owners see increased equity and higher resale profit.
The downside is that this scenario creates a challenge for investors looking to buy property. Given higher acquisition costs, they may see reduced margins and lower deal profits. Higher inflation for extended periods can also reduce investment activity, and properties may take longer to sell.
Rental yields
Rental yields depend on supply and demand. In tight markets, investors may raise rents, but affordability limits how much tenants can pay.
When housing inflation pushes property values higher, yields decline unless rents rise at the same pace. Investors might try to keep up, but at some point, affordability caps rent growth, forcing property owners to accept lower yields and reduced returns.
Mortgage rates
Higher interest rates drive up mortgage rates and the costs of borrowing money. This impacts how much buyers can afford, reducing demand and slowing sales. These higher rates cut into investor profits and force them to be more selective about deals.
Investors might also change their strategy to rely less on debt or leverage alternative financing to offset higher borrowing costs.
Strategies for investors to manage housing inflation
Here are a few strategies to help investors adapt to rental market inflation challenges:
- Hedging against inflation: One approach investors can take is to buy steady asset classes in areas of the country seeing increased demand with limited supply. This approach requires ongoing research and monitoring of market trends through sources like the Federal Reserve, U.S. Census Bureau, and local MLS data.
- Portfolio diversification: Investors can also diversify their portfolios across multiple geographic regions, property sectors, and tenant profiles. Examples can include holding assets in residential, industrial, or mixed-use developments to help reduce exposure in any single market or sector.
- Adjusting financing strategies: Another option is to consider various financing options. For example, investors might use fixed-rate financing or leverage hard money loans to move quickly on great opportunities. They may also turn to creative strategies like seller financing or lease options.
- Revisit exit plans: Real estate investors may need to reconsider liquidation strategies if the market doesn’t support the original exit plan. Instead of a traditional sale, investors can offer creative financing to buyers or look at repurposing the property if demand shifts toward alternative uses.
Role of technology in managing inflationary pressures
Technology gives investors another tool to tackle shelter inflation challenges:
| Technology solution | Impact | Example |
| Investment management platforms | Cultivate investor relationships and raise capital to support growth objectives. | Real estate investor management software. |
| Data analytics | Track market data for better decision-making. | 3rd party subscription services, in-house AI models. |
| PropTech innovations | Improve operational efficiency. | Building and tenant management. |
Investment management platforms
Firms looking for alternative financing sources can use investment management software to develop investor relationships and raise capital to grow their portfolios. This source of funding can help firms gain a competitive advantage and move quickly on opportunities.
Integrated tools like an investor portal and CRM make it easy to communicate quickly with investors and keep them updated on their investment status. This helps build trust and keeps all stakeholders aligned on the overall strategy.
These platforms also help automate financial calculations and distributions for investor returns. During inflationary periods that could impact profitability, being able to accurately calculate and process distributions helps with cash flow management and investor transparency.
Data analytics
Internally, firms can leverage real estate investment dashboards to make operational and investment decisions. Centralized dashboards provide on-demand access to metrics like IRR and cash flow and help firms quickly assess potential strategy changes.
Another option is building in-house AI models to organize and apply data from multiple sources to help drive strategy.
For external data, investors have options like:
- Public mortgage data from Freddie Mac or Fannie Mae.
- Specialized third-party data subscriptions.
- Paid research services.
PropTech innovations
PropTech technology can help improve operational efficiency to maximize rental yield and investment returns despite higher market prices. These tools can help reduce investment risks with capabilities like:
- Building management: Innovations include tracking building systems to increase efficiency and proactively addressing maintenance issues. IoT devices and predictive technology can help reduce costs through the best use of energy and make sure properties stay updated to reduce repair expenses.
- Tenant management: Technology tools can help operational teams better manage leasing, maintenance requests, and tenant communications. These include capabilities for automating areas like rent collection and tenant screening to help reduce administrative expenses and errors.
Future outlook in housing inflation
The National Association of Realtors predicts better news in 2025, beginning with higher housing starts over 1.3 million in January. Other key trends shaping this year include:
- Market predictions: Higher housing market inflation is a mixed scenario. In 2024, the U.S. had a supply gap of 4 million homes, impacting new potential homeowners and single-family rentals. At the same time, multifamily inventory grew by 560,000 units, helping stabilize apartment vacancy rates at 6.9%.
- Policy implications: The Federal Reserve’s interest rate policy appears to be in a hold-steady mode at the moment, but this could change if the economy sees a downturn or if inflation subsides. At local levels, policies that restrict new development also impact inflation. Every city has a different approach, so investors should research the local market to decide where to invest.
- Long-term investment considerations: Real estate is a location-dependent business. To make solid choices, investors should evaluate what is happening at a local level. What are the population trends? How is the local economy? What are the current projects in the pipeline that will increase the housing supply and impact rental value?
Conclusion
Housing inflation continues to shape the market and bring both challenges and opportunities. Rising costs make affordability harder and put pressure on investment returns.
Investors who do their research and implement strong strategies can still find good deals. Success in 2025 depends on adapting to market movements and finding opportunities where others see obstacles.
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