For the last several years, people have been waiting for a housing crash that never came. Home prices kept climbing. Buyers kept competing over asking price. Every prediction of a collapse quietly expired.
Here’s what most of those predictions missed. A real estate crash did happen. It just happened in commercial real estate, apartment buildings, retail, and office, not in the housing market most people are watching.
Same interest rate environment. Two completely different outcomes. Understanding why explains both what’s happening in your neighborhood and what’s happening to a lot of real estate investors right now.
Disclaimer: This article is for informational and educational purposes only and does not constitute financial, legal, or investment advice. Any investment involves risk, and you should consult your financial advisor, attorney, or CPA before making any investment decisions. Past performance is not indicative of future results. The author and associated entities disclaim any liability for loss incurred as a result of the use of this material or its content.
Why Residential Prices Haven’t Fallen
The numbers don’t support a residential crash narrative. As of June data, home prices rose 0.3% month over month and are up 3% year over year for single-family homes, according to Redfin. The median existing home price nationally sits at $440,600, up 1.8% from a year earlier.
A crash requires a flood of supply overwhelming demand. That’s not the current picture. There are 1.56 million homes for sale, only up 1.3% from a year ago, representing 4.6 months of supply, essentially flat compared to last year.
Foreclosure headlines can be misleading here. A widely cited 21% jump in foreclosure filings sounds alarming until you see the base number. The first half of this year saw roughly 227,000 foreclosures nationally. In the same period in 2010, it was 1.65 million. A 21% increase off a small number is still a small number.
New construction has stayed flat for four years and remains below pandemic-era levels. Meanwhile, an estimated 350,000 homes are lost to fires annually in the US, quietly offsetting new inventory that never gets discussed in supply conversations.
Then there’s the rate mechanism itself. The 30-year fixed mortgage rate sits around 6.6%, tracking closely with the 10-year Treasury yield. Because lending to the federal government carries essentially no default risk, investors demand a premium to lend to individual homebuyers instead. When the 10-year yield was under 2% in early 2022, mortgage rates hovered near 3%. As inflation accelerated and the Federal Reserve raised rates, the 10-year climbed to 4.63%, pulling mortgage rates up with it.
Geopolitical events add another layer. Rate movements have tracked with developments in the Iran conflict. Energy price spikes raise inflation expectations, which pushes investors to demand higher yields as compensation. For the past four years, mortgage rates have stayed rangebound between roughly 6% and 8%, a pattern likely to continue absent a major shift in either monetary policy or geopolitical conditions.
The result is a residential market that’s expensive and slow-moving, not collapsing.
Why Commercial Real Estate Is a Different Story
Residential buyers overwhelmingly use 30-year fixed-rate mortgages. Commercial real estate, particularly value-add multifamily properties, is often financed very differently.
Many of these deals were financed with floating-rate loans on short terms, frequently three to five years, based on an assumption that rates would stay low or that a refinance would be straightforward when the loan matured.
That assumption is where the trouble starts. When a commercial loan reaches maturity, the entire remaining balance comes due at once. This is called a balloon payment, and it stands in sharp contrast to a residential mortgage, where each monthly payment simply chips away at a fixed 30-year schedule. Many of these loans also carry prepayment penalties, making even an early, strategic exit costly.
At maturity, an operator typically has three options: refinance, sell, or bring in additional capital.
Refinancing has become harder because higher rates mean lenders will only extend a smaller percentage of a property’s current value than they would have in 2021. If the property’s value has also declined, which is common in this environment, the gap between the old loan and what a new lender will offer widens further.
Selling isn’t necessarily easier. Commercial property values are closely tied to prevailing interest rates, so a sale executed today often means realizing a loss compared to the original purchase price.
That frequently leaves one remaining path: bringing in new capital. Sponsors or investors contribute additional funds to shrink the loan balance enough for a lender to approve refinancing. It’s money nobody budgeted for at the outset.
A Perfect Storm, Not a Single Cause
What’s made this stretch particularly difficult is that several pressures hit simultaneously rather than one at a time.
Interest rates rose sharply, increasing debt costs directly. Inflation pushed up operating expenses, insurance premiums in particular have climbed significantly in many markets. Rent growth slowed as tenants reached an affordability ceiling, limiting how much of those rising costs could be passed through. And in multifamily specifically, a wave of new supply built during the low-rate years is now delivering into a market where rent growth has already cooled, adding competitive pressure at exactly the wrong moment.
Rate resets, rising costs, an affordability ceiling, and new supply arriving together. That combination, more than any single factor, is what’s produced real distress in parts of the commercial market.
It’s also worth being direct about something. A lot of experienced operators, including large institutional players with far more resources than any individual sponsor, did not see this combination coming. Nobody underwrote deals in 2021 assuming rates would rise this quickly and then stay elevated this long, let alone account for something like a geopolitical shock affecting energy prices and inflation expectations.
That’s not a due diligence failure. It’s a set of conditions that hadn’t shown up together before.
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What This Means Going Forward
Real estate moves in cycles, and every cycle eventually produces both pain and opportunity, often at the same time.
The conditions currently causing distress in parts of the commercial market, loans coming due, forced sales, capital calls, are the same conditions that tend to create the next window of opportunity. Someone has to be on the other side of a forced sale. Distressed assets eventually get repriced to levels that make sense again for a new buyer.
If you’re currently invested in a commercial deal facing these pressures, that’s a real and uncomfortable situation. It doesn’t mean the opportunity in real estate has disappeared. It means that opportunity is currently showing up in a different form than it did during the low-rate years, one built around distressed pricing and disciplined underwriting rather than momentum.
Understanding the difference between how residential and commercial real estate are actually financed is the starting point for making sense of where the market goes next.
If you want to dig deeper into where we’re seeing opportunity emerge in this part of the cycle, we’re covering it at PIMDCON this September in Dallas.
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Peter Kim, MD is the founder of Passive Income MD, the creator of Passive Real Estate Academy, and offers weekly education through his Monday podcast, the Passive Income MD Podcast. Join our community at the Passive Income Doc Facebook Group.
