What Happens to Real Estate When the Dollar Declines?

Dave:
The value of the US dollar is declining and it’s now trading at levels we haven’t seen since before the pandemic. And this matters for real estate investors and the industry as a whole. This may not be as sexy or as flashy as mortgage rate changes, but this is a big change in the investing climate that will impact your portfolio. Today I’ll explain how. Hey everyone, it’s Dave and welcome to On the Market. We created this show to help real estate investors, real estate agents, loan officers, and everyone else even just interested in real estate. Understand how recent data and macroeconomics impact our industry. Currency is not really something we talk a lot about because honestly the dollar has been really strong since we first started airing the show back in April of 2022. But that trend is changing. The dollar had its worst first half of the year since 19 to 73, and although that does sound worse than it is because the dollar is still relatively strong, subtle shifts in the value of the US dollar can have really big impacts on the US economy.
And I’m talking huge impacts and that includes real estate even if those impacts aren’t so immediately obvious. So in today’s episode, we’re going to dive into this important shift. I’m going to explain some background context about what a weak or a strong US dollar even means in the first place, why the dollar’s value fluctuates, what’s happening recently, but this won’t just be an econ lesson, I promise. I will spend the majority of the time talking about what changes to the dollar’s value means for real estate valuations, for interest rates and more. So let’s do this. Okay, first up, we got to get some context about this whole dollar value thing because it’s not really the most intuitive thing about economics. What you need to know on the highest level is that the dollar is traded on an open market with other currencies. So for example, you can go out and buy US dollars with euros, you can buy dollars with Japanese yen and so on.
And just like in every free market, the price of goods are dictated by supply and demand. So when more people want dollars, prices go up, that leads to a stronger dollar when fewer people want the dollar that leads to a weaker dollar and so on. And so hopefully that makes sense to everyone, right? This is just kind of basic supply and demand about how the price and weakness of dollars work. But of course, the dollar and what drives supply and demand for the dollar is very different for what it is in the stock market or in the real estate market. So let’s just talk for a moment about what causes changes in supply and demand for US dollars. The first biggest one is really interest rates. When US interest rates are higher, that tends to attract foreign capital because investors want to buy US bonds or treasuries and deposit it in US banks to earn higher returns.
That increases demand for dollars. If for example, you live in, I don’t know, Spain, and the interest rate is 2% and in the US it’s 5%, those investors in Spain might say, Hey, I want to go invest in these assets in the United States, and in order to invest in those assets, they need US dollars to invest. So that increases the demand for dollars. On the opposite end of the spectrum, of course, if US interest rates are lower dollars become less attractive and that will weaken the dollar. So that’s interest rates. The second thing is inflation. Low inflation usually supports a strong currency because every dollar holds its value better. If you buy a dollar and inflation is devaluing that dollar, you’re not going to really want that dollar as much, right? And instead, if you are able to buy a dollar that is not impacted by inflation, that is much more attractive.
And so high inflation can erode the dollars value because it costs more dollars to buy the same goods and because other nations may lose confidence in that dollar. And then again, lower inflation generally supports a stronger dollar. Third thing that impacts supply and demand for the dollar is economic growth and strength. When the US economy is strong and growing, it can bolster the dollar because investors just want to invest in US assets. Just look at the stock market in the United States over the last 10, 15 years, it’s been incredibly strong. And so a lot of investors for Asia, Europe, south America, Africa, all these other places in the world want to invest in these US assets. To do that, they need US dollars and so they need to go buy those dollars that supports a stronger dollar. On the other hand, if there is weak economic growth that supports a weaker dollar.
So those are really the big three things. Interest rates, inflation, economic growth. There are other things like trade balances. Certain countries have different beliefs on trade balances, but that can impact the dollar strength. And then there are other intangibles like political stability, government policies, investor sentiment. All of this plays a role. We’re not going to get into this fully today because it’s a whole topic unto itself, but the fact that the United States is the global reserve currency does really support a very high floor for the value of the dollar. So if you want to look at this as a whole, if you sort of just want the big picture of what drives this, the dollars exchange rate is essentially a scoreboard. It is a scoreboard of investor opinion on US economic health, our interest rates, and the global trust that investors have and the US economy at any given time. So now that we understand this context, I think we need to move on to two different things. First, we need to talk about what’s happening recently and why the value of the dollar is changing, and two, what that means for real estate investors because I know this kind of seems like an academic econ lesson at this point, but I promise you you’ll see that the changes in the dollars value have huge implications for the housing market. We’re going to get to the both of those topics right after this break.
Everyone, welcome back to On the Market. I’m Dave Meyer here talking about the recent decline in the US dollars value and what this means for real estate investors. Before the break, we talked about some context about what moves the dollar value, but I want to talk about what has happened recently. The dollar has had a bad start to the year. I think it’s important to keep this all in perspective because the dollar’s value is still strong, but it is lower than it was during the pandemic. And this can matter to us. It will matter to us as investors. So why is this happening? Why has the dollar gotten enough to such a bad start this year? The first thing in my opinion is interest rate expectations shift. Like I said, a lot of the value of the dollar is based on our interest rate position relative to the rest of the world.
And so we’ve had super high interest rates over the last couple of years. So it made sense that a lot of investors wanted to invest in the US when interest rates were so high, but now the sort of expectation is shifting back in the other direction and people are generally believing, I think so too. At some point this year, the fed will probably cut rates, which will reduce the incentive to hold dollars. Just as an example, if Europe or Japan’s interest rates become relatively more attractive than the United States and some investors may rebalance their portfolios away from dollars that eases demand. So that’s one thing. The second thing is about economic policy and debt concern. As I said before, investors generally want to invest when they’re buying dollars, when they’re buying bonds and treasuries, they want to do that in a stable economy. And right now our economic policy, whether you believe in it or not, has been very unpredictable.
And those kinds of fiscal policies where investors don’t know what’s going to happen from one month to another might worry investors and cause them to pull some money out of the US economy and invest elsewhere. The other piece of this is debt. We’ve talked about this on the show a lot, but basically if the debt keeps spiraling, there’s an increased risk that the US is going to need to print more money to service that debt and that increases the risk of inflation. And people who invest in the dollar, people who invest in treasuries, in bonds, they are very fearful of inflation. They do not like inflation. And so if they have fears that in the long run there’s going to be upward pressure on inflation in the United States, they may again choose to take some money out of the US and put it elsewhere. Next is just trade tension and global sentiment.
Certain US policy moves like broad tariffs on imports in 2025 have created among some investors the fear of slower growth. Now, not everyone disagrees. Some people think that tariffs are going to come in and revitalize manufacturing in the US and lead to more growth, but some investors may think that this is going to drag on the US economy because we’re going to have this new tax on imports. That’s what tariffs are. And so they might again want to put their money elsewhere. So all of those things are kind of like things that are going on in the us but not all of this is necessarily even about what’s going on in the US because part of the dollars decline might not be that the US is doing worse per se. It could also be just that other countries are doing better. When you think about who has massive amounts of money is really moving these markets, it’s things like hedge funds, pension funds, sovereign wealth funds.
They might just say, Hey, the US is great, but Europe’s now doing a little bit better, so I’m going to put a little bit of my money in the European stock market or into European bonds, and that will increase demand for euros relative to dollars that can change it too. And then the last thing here is safe haven flows reversing the opposite might be happening. I said, some investors may be fearful of the US and so they’re moving their money elsewhere. But the opposite could be happening too, where some people no longer see the risk of a global recession really high and they no longer need to use the US as this safe haven. And so they’re saying, I’m going to take a risk. I’m going to bet on emerging markets instead of just betting on the us and it might just be wanting to diversify.
And so I personally don’t think it’s just one thing that’s leading to this, but it’s kind of a combination of all these things. But the fact of the matter is the US dollar is declined, and while we don’t know if it’s going to continue declining even just this decline, we’ll have some impacts on the real estate market. And I do encourage everyone to sort of follow along. I’ll obviously update you on the show as much as I can, but follow along because further declines will only exacerbate the stuff we’re about to talk about, which is what this all means for real estate. So with that, let’s turn this to real estate and how this is going to impact us as real estate investors. There are basically three ways that I feel like exchange rates and the value of the dollar filter into real estate. The first is through inflation.
And honestly, that sort of goes into a second thing on home prices and if home prices will inflate. The second is interest rates, most notably for us and mortgage rates. And then the third which is smaller, but I actually think could matter is international investment. So let’s break these three things down. As I said, the first is inflation because a weaker dollar can contribute to higher inflation because imports like oil or timber or construction materials, they all become more expensive in US dollar terms. And I know this can be a little bit tricky to sort of wrap your head around because the price might not necessarily change for you, but it will matter for importers because if an importer needs to go and buy, let’s just call it tile from Italy, right? If you need to go buy tile from Italy, you’re going to need euros a lot of times to go buy those things and those euros are going to cost you more dollars.
So relatively speaking, those tiles may have got more expensive for us in the US even though the price might not have changed in Italy or in euros. So when those importers face these kinds of increased cost, a lot of times what happens is those are passed on to consumers and this can create inflation across the economy. Now again, the dollar has declined, not some crazy amount. I’m not saying that everything’s going to go crazy, but this is likely going to matter if the dollar stays at its current level, we probably will see some inflation. Now, inflation for real estate investors is sort of this double-edged sword because it generally pushes up the prices of goods and services, but also for tangible assets like homes. So just as some examples, when the dollar loses value construction materials and other goods, those start to cost more in US dollar terms, and that means new development gets more expensive that can drive up the prices of existing homes if there is less new construction.
This is why historically real estate is often seen as an inflation hedge because in times of rising prices, which a weak dollar can fuel property values and rents tend to increase at least in nominal terms. So if the dollars decline does in fact lead to inflation, homeowners might see their property values climb faster and landlords may able to charge higher rents over time. That’s the sort of good news side for property owners, especially for those using leverage because if you’ve locked in your fixed rate debt and your asset value is going up, that can create really good returns for you. However, I want to caution that inflation can also raise your operating costs, right? Because maintenance is probably going to get more expensive. Property tax is probably going to get more expensive, so you have to factor that in. I also want to mention that not everywhere will inflate or appreciate at the same rate. So it really depends on local demand and supply, but this prospect of inflation could impact home prices in the future. The other two ways that the dollars relative strength can impact the housing market are interest rates and international investing, but we got to take one more quick break. We will be back right after this.
Welcome back to On the Market. I’m Dave Meyer talking about the slide in the dollar this year and what it means for real estate investors. Before the break, I was covering my first of three ways that I think this will impact the housing market that was inflation and housing prices. Next up is interest rates and the prospect of mortgage rates cuts. The other side of the inflation coin is mortgage rates. We’ve seen this for the last couple of years. Everyone knows this Now, that to fight inflation, what the fed usually does has raise interest rates, which could mean mortgage rates go up as well. Even if the Fed isn’t actively hiking rates, interest rates and mortgage rates could still go up because if international investors lose appetite for US bonds due to weak dollar environment, all the stuff that we talked about before, that can push up long-term interest rates in the United States, and that means mortgage rates could go higher.
And if that happens, that could reduce buyer demand. So this really is sort of a balancing act for real estate investors, right? Because a weaker dollar could boost home values value of inflation, but it also threatens to hurt values because of financing costs, right? In today’s day and age in the economy, there are no clear answers. I just kind of want to explain to you the different things that could happen. So just one more thing in practical terms, if the dollar does happen to keep sliding, we don’t know, but if it does and inflation does, again, another unknown, if it does go up, we’ll also probably see cap rate, expansion cap rate starting to go up because investors will demand higher returns to mitigate the risk of inflation. That could put downward pressure on property prices, particularly in commercial real estate. But for those in the residential market, if you have fixed rate mortgages, this inflation can actually be a boon because you’re going to pay back your loan in cheaper dollars.
But new buyers or those on adjustable rate mortgages will feel that squeeze of higher rates. So again, just want to emphasize across the economy. There are pros and cons to this, right? A weaker dollar does have value outside of real estate too. It can help boost American manufacturing, right? It makes our exports cheaper to foreign markets which could boost demand for manufacturing. And just like that, there are trade-offs, trade-offs in real estate as well. Inflation and rents might lift property values, but rising interest rates long term. I’m not saying the short term can dampen demand and the net effect on residential real estate is going to largely depend on what’s happening more in your local market. So I’m just talking at a national level and what’s going to really happen matters in your particular market. For instance, if you’re in a supply constrained, high demand, city inflation might simply add fuel to price growth and that would be great and it would outweigh any other benefits in other areas, the hit to affordability from high rates might dominate and that might cool prices.
I just want you all to understand the mechanics of what might happen. The third and last thing, the way the dollars value could come into real estate is actually from foreign investment in US housing because one direct way that the dollars value hits real estate is that it becomes relatively cheaper for foreign investors to buy real estate in the United States. Now, total investing by foreign buyers in the United States is not that high. It’s about one to 2%, but it could really matter in the cities that tend to attract these types of investments, these are sort of major, they call them gateway cities. They’re like cities like Miami or LA or New York. And if foreign investors want to diversify out of their own economy or they just want to buy US assets, then it is becoming relatively cheaper for those foreign investors to buy property in the United States.
And so it might be an increase in foreign demand. We might see international activity in the housing market actually pick up. And I just want to be honest, I think for most markets, I don’t think this is really going to matter because if you’re investing in the Midwest, Southeast, a lot of these smaller mid-size markets, they’re not going to attract a ton of international investment from a residential perspective if you’re in New York or LA or Miami or these types of major cities, it could actually matter. Where I do think it might matter more is in the commercial real estate. My guess is that we are not going to see some huge uptick in individuals who want to go buy a condo in the Midwest. That’s probably not going to happen. But foreign institutional investors like foreign pension funds or sovereign wealth funds, they already allocate a lot of money to US assets, whether that’s stock market or commercial properties.
And when the dollar gets weaker, those overseas investors effectively get us assets on sale, and that means that they could put more money into US offices or hotels or multifamily properties or warehouses or whatever. And so I do think this actually could be a benefit for commercial property values if we get more for an investment from those types of institutional investors. So those are the three ways I think this could spill over into the real estate market. Let’s just sort of summarize what we’ve talked about today. I know this is a lot of econ. It’s not something we talk about all the time in the show, but it is super important. First things first, what’s better? A stronger dollar or a weaker dollar, I want to emphasize that there is no absolute good or bad. A strong dollar isn’t universally good, nor is a weak dollar universally bad.
It depends on who you are and what you’re invested in. I’ll just go over what I think a strong dollar is good for. The pros of having a strong dollar are one cheaper imports and travel. A strong dollar means Americans can buy imported goods like cars or electronics or raw materials at lower prices, and this helps keep us inflation low. This is stuff like gas, food, other commodities. These are priced in dollars will cost less domestically when the dollar is doing well. Next, if you like to travel, American tourists also get to get a little bit more bang for their buck when you’re traveling to foreign countries. When the dollar is strong for real estate, a strong dollar can lead to lower inflation and that can mean lower interest rates in the long run, which supports borrowing and long-term stability. On the cons side, some of the downside of a strong dollar is that export and foreign demand suffer because US products become more expensive overseas, and this can hurt export focused businesses like manufacturing and it can drag on economic growth.
It’s not good for areas that are reliant on manufacturing or agricultural exports. That means fewer sales. And this is why I think the Trump administration, I’m just guessing here, but is one reason I would imagine the Trump administration might not mind a weaker dollar. They have stated that they have a goal of helping to boost domestic manufacturing and having a weaker dollar can definitely be an asset in that campaign. So again, strong dollar is good for consuming when you want to buy stuff, travel, keeping inflation in track, but it can be tough for producing like exporting domestic industry competitive. Those are the trade-offs. How about when the dollar is weak? Well, there are benefits when the dollar is weak. It’s sort of the inverse of what I was just saying. US exports and industries get a boost because it becomes cheaper for foreign buyers. For real estate, it could really help for property owners who are looking to sell because prices might go up or raise capital, but it could also increase competition.
Some of the downsides to a weak dollar. The real thing is inflation. It could lead to higher costs for Americans. Again, the slide we’ve seen so far is not super dramatic, but it is something to note. But if that does continue, we will probably see inflationary pressure that could spill over into the economy. It also means if you’re traveling and borrowed, things are going to be a little bit pricier. And for businesses, companies that rely on importing raw materials like a lot of construction are going to go up. And so that is something to definitely keep an eye on if the dollar keeps weakening, is what happens to construction costs. So a slightly weaker dollar like we’re seeing might not be concerned. I think a lot of economists would probably say that that’s actually desirable to depending on who you ask. So just know that a balance is probably what you want and there are trade-offs to both.
So the thing that I will watch for is first and foremost, if we see bigger slides in the dollar, I’m going to be more fearful of inflation and we’ll plan my investing portfolio and decisions accordingly. And if that happens, we’ll see two trends emerge. Potential for value assets to go up, but also for input costs and construction costs to go up and there’ll be more long-term pressure on interest rates, and that could have a lot of impacts for real estate. It’s really hard to say that right now, so I am not fearful, but the way I personally have been adjusting this year based on all the US debt that we have and based on the dollars relative weakness, personally, what I’m thinking right now is that fixed rate debt is really the winner here. I had been thinking earlier in the year about commercial real estate and I’m still considering it.
I am not saying that I’m writing it off, but right now I’m focusing more on two to four unit deals just due to the debt structure alone because I think interest rates might come down a bit this year, maybe a bit more next year, but there is some concern I have that interest rates will rise well into the future. I don’t know if that starts next year or the year after that, but I do think that there could be upward pressure on mortgage rates over the long run. And so what I want to do is lock in the rates that we’re going to see over the next couple of years. And I know a lot of people think, oh my God, that’s crazy. They’re so much higher than they were in 20 20, 20 22. There is no guarantee we’re going back to that ever, right? That was a very unique time.
And so I think people need to open their minds to the idea that not only could interest rates go down, but they could also go up. I’m not trying to be negative. I think in the short term rates might go down, but I think long-term seeing some trends emerge that worry me about interest rates. And so what I want to do in my portfolio is locked in that fixed rate debt. That is my main takeaway from all of this. You all can do what you want, but that’s basically how I’m thinking about adjusting based on this new trend that is emerging. Alright, that’s what we got for you today. Thank you all so much for listening to this episode of On the Market. I hope it was helpful to you. I know this isn’t as obviously connected to real estate, but I hope you could see that even though this is a little bit heady, more macro economics, that there are real implications for the housing market and for investors who understand this stuff. You will have an advantage over a lot of people who just aren’t looking at this and are only going to concentrate on what the mortgage rate is today and not think about where rates might go in the future, where property values might be going in the future. That’s why I wanted to share this with all of you today. Thanks again for listening. We’ll see you next time.