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How the National Economy Affects Your Home Prices

How the National Economy Affects Your Home Prices

One mantra in real estate investing is that “all real estate is local” and that’s largely true. There are 384 Metropolitan Statistical Areas (MSAs) in the United States, and each has their own supply and demand characteristics – such as job growth, population growth, current inventory, and new home inventory – that determine home price appreciation.

However, there are also four national-level factors that affect your property values as well, which you as an investor should have on your radar. The first three are straightforward, but the last one is one that investors aren’t often aware of. They are:

  • Interest rates
  • Inflation
  • Recession
  • Capital Flows

Interest rates

Interest rates are determined at a national level, and rising interest rates hurt investors because as rates increase, housing gets less affordable, and the pool of qualified buyers goes down. This dampening of demand usually results in a drop in home values.

In the early 1980s for example, mortgage rates went as high as 18.6% and as rates declined, home prices increased.

FRED 30 Year Fixed Rate Mortgages 1975 to 2020
If you’re planning on selling an investment property, rising interest rates could hamper your plans. If you’re buying-and-holding, you can just wait it out and your home price should recover.


Inflation is also determined at the national level, either from over-expansion of the money supply, or disruption of supply chains. Inflation is a net-positive for investors because it causes rents and property values to go up over time and enables investors to pay off their mortgages with devalued dollars.
There hasn’t been much inflation over the last 20 years, but it has come back recently with the Fed’s rate increases and the increased cost of reshoring manufacturing back to the United States. 

It remains to be seen how this will play out, but investors shouldn’t forget about inflation.


If inflation is when the economy is overheating, recession is when the economy has cooled down, resulting in job losses and higher unemployment.

This is shown on the previous graph. The shaded areas represent periods of recession, and in 1990 (post Gulf-War), 2001 (dot-com bubble) and 2009 (Global Financial Crisis), home prices flattened or dropped.

This affects investors when their tenants lose their jobs and can no longer pay rent or they move out and create more vacancies. This effect is especially felt in single-industry markets like Las Vegas or Detroit.

When times are bad, the first thing consumers cut back on is discretionary spending like trips to Vegas or buying a new car.

Investors should protect themselves from this risk by focusing on markets with diverse economies such as Atlanta. When parts of the Atlanta economy were in recession (such as Delta Airlines during the Covid pandemic), other parts of the Atlanta economy (Home Depot, UPS, hospitals, universities, Center for Disease Control) continued to provide stable jobs.

Another way investors can protect themselves is to have recession-proof tenants, such as Section 8 tenants. During the Covid pandemic, many tenants were unable to work, and landlords were prevented from evicting them due to eviction moratoriums! But the Section 8 program still paid its share of the rent like clockwork on the first of each month.

Finally, the good news is that in the post-war period, the average length of a recession has been about 10 months, so this too shall pass. Long-term buy-and-hold investors in markets with diverse economies can wait it out.

Capital flows

The national-level variable that’s most often off the radar of investors is capital flows. There are two examples of this: Foreign money and Wall Street money.

Foreign Money

When the US Dollar is weak against other currencies, US real estate looks inexpensive and foreign money pours into certain US real estate markets, causing prices to rise due to increased demand.

Generalizations are dangerous, but broadly speaking, European investors buy in New York or Florida; Asian investors buy in California, Seattle, Vancouver and to some extent in Las Vegas. Latin American investors buy in Miami. These investors are largely individual investors buying single-family homes. Institutional money tends to buy commercial properties like office buildings and shopping malls.

If you own residential property in any of these areas, you might experience an influx in foreign capital that results in rising home prices.

Wall Street Money

Another source of capital flows is Wall Street. When real estate is in vogue, Wall Street capital can drive a market up – or support a market bottom. 

During the financial crisis in 2008-10, Wall Street firms were buying up property all over the US at fire sale prices. While homes didn’t necessarily appreciate during that time, the influx of money did work to provide a floor for prices and keep them from dropping even lower.

Even with today’s higher interest rates, if property values were to drop in a given metro, Wall Street money could pour in and provide a support level for home prices in that metro.

Note that this effect only applies in certain markets. Wall Street money goes to large, gateway cities like Atlanta, Dallas, Houston, Phoenix, and Las Vegas and usually goes to newer construction homes. Don’t buy a 100-year-old house in Toledo and think that Wall Street money is going to provide a floor for your property price.

What’s More Important?

So, when determining whether a market will appreciate, what’s more important: Local economic drivers like job and population growth, or national economic drivers like the four we just discussed?

My back-of-the-envelope analysis indicates that local factors are more important most of the time, but at the extremes, national factors can override local economics.

Looking at the 40-year period from 1980 to 2020, I see about eight years in which national factors such as interest rates, recession and capital flows dwarfed local economics:

  • 1980-1982: High interest rates
  • 1990, 2001, 2008-10:  Recession, Capital Flows

That translates to roughly 20% of the time when national factors predominate and 80% of the time when local factors predominate.

Takeaways for Investors

To sum up, here are some implications you should consider as an investor:

  • Invest in recession-resistant markets with diverse economies;
  • Invest in recession-resistant tenants like Section 8 tenants, or retirees who don’t need a job;
  • Follow the money: Where would foreign money or Wall Street money invest?
This can provide some upside as well as protect your downside.
  • When deciding where to invest, focus primarily on the local economic factors such as job and population growth, diverse economies, landlord-friendliness, etc., but be aware of the national factors as well so you’re not blindsided.

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