What is the biggest threat to the US real estate market?

The biggest threat to the US real estate market is not a single dramatic event like a sudden nationwide crash. It is a slower, more corrosive dynamic where an affordability squeeze steadily turns into a liquidity squeeze, and the market stops functioning like a healthy marketplace. Prices can stay stubborn. Headlines can sound calm. But underneath, the system becomes harder to transact in, harder to finance, and easier to break in pockets that eventually matter.

Affordability is the part most people recognize. After years of price growth, the monthly cost of owning a home remains heavy in a world where mortgage rates are still elevated compared with the prior decade. Even when rates drift down from peak levels, they can stay high enough to keep a large share of buyers sidelined, especially first time buyers who do not have equity from a previous home to roll forward. When buyers cannot comfortably afford the monthly payment, demand softens. That is normal. What is not normal is what happens next. In a typical market, weaker demand nudges prices down until buyers and sellers find a new meeting point. Housing often does not do that cleanly because supply is slow, sellers are emotionally anchored to a number, and financing acts like a gatekeeper. Instead of clearing, the market can clog.

One reason the market clogs is the lock in effect. A large number of homeowners hold mortgages originated when rates were far lower. Selling a home means giving up a cheap loan and replacing it with a more expensive one. Even if a family wants to move, the arithmetic can make the move feel like a pay cut. So owners delay, stay put, renovate instead, or rent out the property if they can. The result is fewer listings, fewer transactions, and a thinner marketplace where each sale carries more weight than it should.

This is how affordability becomes a liquidity issue. Liquidity in housing is not about how many people want a home in theory. It is about how easily buyers and sellers can match at a price that works, within a reasonable time, without either side feeling forced. When liquidity is healthy, transactions happen and price discovery is continuous. When liquidity thins, price discovery breaks. Sellers do not want to cut. Buyers cannot stretch. Homes sit longer, then get pulled, then reappear later, or never return. That behavior is a signal that the market is not clearing, it is stalling.

The problem gets bigger once you realize the monthly payment is no longer just the mortgage. Housing costs have become a stack, and each layer is getting more expensive or more uncertain in ways that do not always show up in national statistics. Property taxes rise with assessments and local budgets. HOA fees climb as insurance and maintenance costs increase. Repairs and renovations are more expensive because labor and materials are costly. Most importantly, homeowners insurance has turned from a line item into a risk variable. In some high risk areas, premiums jump quickly, coverage options shrink, and renewal terms can change with little warning. A buyer who might barely qualify for the mortgage can be pushed out by the total monthly burden once insurance and taxes are added. A seller can insist their home is “worth” a certain number, but buyers are pricing the full carrying cost, not the seller’s memory of last year’s comps.

This is where the liquidity squeeze becomes dangerous. The market can look stable because supply is constrained and sellers resist price cuts, but stability that comes from paralysis is fragile. If the market cannot clear, it loses its ability to absorb shocks. A small shock that would normally be handled by a gradual price adjustment can instead show up as distress, because there is no smooth path for transaction volume to recover. You often see the earliest stress at the margin, not in the center of the market. That margin includes households with thinner cash buffers, buyers using more flexible or government backed loan programs, and regions where insurance, taxes, or job markets add extra pressure. When those households face payment shocks from rising costs, job disruptions, or higher renewal bills, delinquencies rise first. Foreclosure activity can start to trend up in specific states or metros. That does not automatically imply a 2008 style collapse, but it does tell you where resilience is weakening. It is the market quietly revealing which segments have less room to adapt.

Another reason this threat matters is that real estate is not one market. Residential housing is a large asset class held by households, often financed with long term fixed rate loans. Commercial real estate is a different machine. It is more refinance dependent, more sensitive to cash flow, and more intertwined with the balance sheets of regional and community banks. Office properties in particular still face vacancy and demand uncertainty, and a large volume of commercial loans must be refinanced over the coming years. When that refinancing meets higher borrowing costs and weaker property fundamentals, lenders get cautious. The risk to housing is not that an office building problem magically becomes a suburban home problem overnight. The risk is that credit conditions tighten more broadly. When banks pull back, they do not always do it with perfect precision. Underwriting standards can tighten across the board, appraisal assumptions can become more conservative, and financing for development can become harder. That credit tightening reduces the number of qualified buyers and slows new supply, which further complicates a market already struggling to clear.

So the biggest threat is best described as market function risk rather than price risk. Price risk is familiar. Prices can fall, values adjust, and life goes on. Market function risk is different. It is what happens when the system that allows transactions to occur starts to seize. Buyers cannot buy at today’s monthly costs. Sellers will not sell because moving resets their mortgage to a higher rate. Insurers retreat or reprice aggressively in certain areas. Lenders tighten standards. Builders cannot underwrite projects confidently. Transactions stay weak, not for a season, but as a feature. That is a slow grind that can last longer than people expect and can create uneven pockets of distress.

If you want to know whether this threat is growing or fading, watch the signs of clearing. A meaningful, sustained improvement in affordability helps, but it needs to show up in monthly payments, not just in optimistic forecasts. Watch whether transaction volume recovers in a way that suggests buyers and sellers are meeting in the middle. Pay attention to whether sellers are reducing prices or simply withdrawing listings, because withdrawals can indicate standoff rather than resolution. Track insurance trends in high risk states and regions, because insurance can quietly determine who can own, where, and at what effective cost. And keep an eye on commercial real estate stress and regional bank behavior, because that is one of the cleaner channels through which real estate strain can spill into broader credit tightening.

The lesson is not that housing must crash. The lesson is that housing can become dysfunctional without crashing, and dysfunction is its own kind of threat. A frozen market is not a stable market. It is a market that has lost its ability to adapt smoothly. When adaptation fails, the pain does not disappear. It concentrates, it localizes, and it eventually finds its way into the parts of the system that people assumed were safe.