The Perfect Storm: Geopolitical and Domestic Policy Risks Reshape U.S. Housing Markets

The U.S. housing market is at a breaking point. Chapman University's 2025 Demographia International Housing Affordability report paints a grim picture: for the first time in 21 years, no major housing market across eight nations is deemed “affordable.” In the U.S., cities like San Jose (median multiple of 12.1) and Los Angeles (11.2) epitomize a crisis driven by structural imbalances, regulatory inertia, and demographic pressures. These factors are not just reshaping local economies—they are creating systemic risks for investors in real estate investment trusts (REITs), mortgage-backed securities (MBS), and residential development equities.

Structural Imbalances and Regulatory Inertia

Chapman's findings underscore a paradox: urban containment policies, designed to curb sprawl and promote density, have instead exacerbated land shortages and inflated prices. Greenbelts, urban growth boundaries, and restrictive zoning laws have locked in supply constraints, particularly in high-demand coastal markets. For example, land values in urban cores have surged 8–20 times higher than in unregulated areas, disproportionately affecting middle- and lower-income households. This regulatory rigidity has stifled new construction, creating a “feudalizing” effect where housing access becomes a privilege of the wealthy.

Demographic trends compound these challenges. In cities like San Francisco and San Diego, an influx of young professionals, immigrants, and minorities—groups already marginalized in the housing market—has intensified competition for limited inventory. The result is a vicious cycle: rising prices drive out first-time buyers, deepening generational inequity and regional economic stagnation.

Geopolitical and Domestic Policy Risks

The 2025 housing crisis is not confined to local markets. Global geopolitical tensions and domestic policy shifts are amplifying risks for real estate and MBS markets. Under the Trump administration, aggressive trade policies—including tariffs on Canadian, Mexican, and Chinese goods—have disrupted supply chains and inflated construction costs. Steel and aluminum tariffs, for instance, have driven up material prices, squeezing margins for developers and delaying projects.

Meanwhile, the Federal Reserve's monetary policy has become decoupled from mortgage rates. Despite rate cuts in late 2024, mortgage rates remain stubbornly high, with the 10-year Treasury-MBS spread widening to over 3 percentage points. This divergence reflects heightened sensitivity to inflation, policy uncertainty, and geopolitical shocks, such as U.S. military actions in the Middle East, which have spiked energy prices and global risk aversion.

For investors, these dynamics create a volatile landscape. Agency MBS, backed by Fannie Mae and Freddie Mac, have outperformed equities during market corrections, offering yield premiums of 150–200 basis points over Treasuries. The Schwab MBS ETF (SMBS), for example, has delivered a 5.4% yield and 3.35% year-to-date returns in 2025, highlighting the sector's resilience. However, prepayment risks remain low, with 70% of existing mortgages at sub-5% rates, stabilizing cash flows.

Implications for REITs and Residential Development

The ripple effects of trade tensions and regulatory shifts are unevenly distributed across real estate sectors. Industrial and logistics REITs, heavily exposed to global trade, have suffered the most. After April 2025 tariff announcements, industrial REITs plummeted by -18.9%, while lodging and resort REITs dropped -16.0%. In contrast, multifamily and healthcare REITs have shown resilience, driven by stable demand and contractual income streams.

Residential development equities face a dual challenge: high construction costs and regulatory hurdles. Zoning reforms, though advocated by the Trump administration, are constrained by local resistance and reliance on immigrant labor and imported materials. For instance, a January 2025 pause on federal affordable housing grants underscored the fragility of policy-driven initiatives. Developers must now navigate a patchwork of state and local regulations, with mixed-use projects offering the most flexibility.

Strategic Investment Considerations

For investors, the path forward requires a nuanced approach:
1. Defensive Positioning in MBS: Agency MBS remain a compelling asset class, offering downside protection and steady yields. The SMBS ETF's performance underscores its appeal as a hedge against equity market volatility.
2. Sector Rotation to Resilient REITs: Multifamily and healthcare REITs, with their stable cash flows and domestic demand, are better positioned to weather trade and energy shocks. Coastal multifamily REITs, in particular, have seen occupancy rates climb to 95% in key markets like Los Angeles.
3. Geographic Diversification: Secondary markets and suburban areas, less impacted by global trade tensions, offer attractive entry points. Cities like Pittsburgh and Cleveland, with median multiples of 3.2–3.6, represent value opportunities amid urban affordability crises.
4. Zoning and Policy Monitoring: Investors should closely track local zoning reforms and housing finance policies. Cities adopting flexible zoning (e.g., allowing denser housing) could unlock 30%+ value for developers, though community pushback remains a risk.

Conclusion

The U.S. housing affordability crisis is a confluence of structural, regulatory, and geopolitical forces. While Chapman University's findings highlight the urgency of addressing supply-side constraints, investors must also grapple with the broader implications of trade tensions and policy shifts. For those willing to navigate the complexity, opportunities exist in defensive MBS, resilient REITs, and strategic geographic diversification. The key lies in balancing long-term fundamentals—demographics, urbanization, and economic growth—with the short-term turbulence of a fragmented global environment.

As the market evolves, one thing is clear: the next chapter of U.S. housing will be defined not by affordability, but by adaptability.