When Not to Buy Real Estate Despite Falling Mortgage Rates: A 2025 Investor's Guide

The U.S. real estate market in late 2025 is navigating a delicate balance between declining mortgage rates and persistent affordability challenges. While the 30-year fixed-rate mortgage averaged 6.19% as of December 2025-a drop from 6.69% a year earlier-home prices have surged 50% since 2020, creating a paradox: lower borrowing costs coexist with a market where demand remains constrained by high prices and limited inventory. For investors, this environment demands a rigorous evaluation of financial readiness and market risk metrics to determine when to avoid real estate purchases, even as rates trend downward.

Financial Readiness: Beyond Mortgage Rates

Financial readiness in 2025 extends beyond assessing interest rates. According to new U.S. climate risk reporting mandates, regulatory compliance adds layers of complexity for developers and investors. Additionally, due diligence during the 30–90 day period post-Purchase and Sale Agreement acceptance is critical to identifying hidden risks, such as rising insurance costs or infrastructure gaps. Location-specific factors, including community development plans and zoning changes, further influence a property's long-term value. For instance, markets with underdeveloped public transit or aging infrastructure may see diminished returns despite favorable financing conditions.

A risk appetite framework, which quantifies acceptable thresholds for vacancy rates, debt service coverage ratios (DSCR), and cap rates, is now essential for investors. This approach ensures decisions align with both market realities and individual risk tolerance.

Market Risk Assessment: Key Metrics to Monitor

Even as mortgage rates decline, real estate investors must scrutinize risk metrics to avoid overexposure. Three critical indicators-Net Operating Income (NOI), Cap Rate, and DSCR-provide clarity on asset viability:

1. NOI and Cap Rate:
2. NOI growth remains uneven in 2025, with industrial and retail sectors showing resilience while office and self-storage properties struggle.

3. Cap rates for Class A multifamily assets hover around 5%, but Class B and C properties command higher cap rates (7%) due to perceived risks. Tight cap rate spreads relative to the 10-year Treasury signal a premium for real estate income over risk-free assets, but investors must prioritize assets with stable cash flows.

4. DSCR Thresholds:

5. Lenders now demand a minimum DSCR of 1.20–1.25× for low-risk properties, with riskier assets requiring 1.30× or higher to account for rate shocks. Stress testing under 50–100 bps rate increases has become standard practice.

6. Implied Volatility:

7. REIT options pricing offers forward-looking insights into property-type risk, with higher volatility indicating greater uncertainty in future price movements.

When Falling Rates Fail to Justify Investment

Despite the allure of lower mortgage rates, several factors suggest caution in 2025:
- Inventory Constraints: Active listings have risen only 4.6% year-over-year, with months of supply at 4.6-a seller's market that limits price corrections.
- Affordability Gaps: Median monthly mortgage payments for the average home remain above $2,500, deterring first-time buyers and reducing demand.
- Regional Disparities: "Refuge markets" with lower price-per-square-foot ratios attract buyers, but oversupply in other regions creates uneven returns.

For example, a 30-year mortgage rate of 6.19% may seem attractive, but it fails to offset the 50% home price increase since 2020. Investors must also consider the likelihood of rate hikes in 2026, as projected by JPMorgan, which could erode refinancing benefits.

Thresholds for Avoiding Real Estate Investment

Investors should avoid purchases when key metrics exceed or fall below critical thresholds:
- DSCR < 1.20×: Indicates insufficient cash flow to cover debt obligations, even under conservative stress scenarios.
- Cap Rates < 5% for multifamily: Suggests overvaluation, particularly in markets with stagnant NOI growth.
- NOI/OpEx Ratios > 65%: Signals unsustainable operating costs, common in older Class C properties.

These thresholds, combined with rising delistings (sellers pulling homes from the market) and sluggish absorption rates, highlight a market where falling rates alone cannot justify entry.

Conclusion: Strategic Caution in a Shifting Landscape

The 2025 real estate market demands a nuanced approach. While declining mortgage rates offer some relief, they do not negate the risks posed by high home prices, regulatory complexity, and sector-specific volatility. Investors must prioritize conservative underwriting, granular data analysis, and alignment with risk appetite frameworks to avoid overexposure. In this environment, patience and discipline-rather than chasing rate-driven optimism-will define successful real estate strategies.