The recent passage of the new federal budget bill has put the issue of America’s growing national debt back in the headlines. As of mid-2025, the U.S. national debt stands at approximately $36.5 trillion (about 130 percent of GDP), and debt service costs have now surpassed defense spending.
This is not a political analysis, nor is it investment advice. Rather, this column examines how a sustained rise in national debt could affect the U.S. real estate sector (both residential and commercial) if the debt-to-GDP ratio continues to climb.
While public debt levels may appear far removed from day-to-day housing concerns, the two are linked in several important ways discussed below. Debt cycles tend to follow predictable patterns, periods of easy credit and asset appreciation, followed by tightening, deleveraging and slower growth. Understanding where we may be in this “long-term debt cycle” can help investors, developers and policymakers anticipate risks and opportunities.
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1. Higher interest rates and mortgage costs
In the current stage of the debt cycle, the government issues increasing amounts of debt to finance deficits. As supply of U.S. Treasury securities grows, investors may demand higher yields to compensate for inflation risk and credit concerns. Recent credit rating downgrades, such as Moody’s, illustrate how market perceptions of debt sustainability can quickly feed into higher Treasury yields.
Because the 30-year fixed mortgage rate closely tracks the 10-year Treasury yield, rising federal borrowing costs push mortgage rates higher. In this “tightening” phase, financing costs climb, liquidity tightens and asset prices face pressure.
Real estate implications:
- Reduced affordability for buyers, as monthly payments rise;
- Lower transaction volumes, as both buyers and sellers delay moves;
- Cap rate expansion in commercial real estate, which compresses valuations.
2. Inflationary pressures
Persistent deficits can also contribute to inflation, especially if addressed with monetary expansion (i.e., “printing money”). Inflation erodes purchasing power but often raises nominal values of real assets, including housing. However, in inflationary phases of the current debt cycle, particularly when tied to currency depreciation, financing conditions can deteriorate even as asset prices rise, creating stagflationary risks.
Real estate implications:
- Rents tend to rise alongside property prices, straining tenants;
- Operating expenses (insurance, taxes, utilities and maintenance) climb with inflation, pressuring net operating income;
- Extended inflation can keep interest rates elevated, prolonging financing challenges.
3. Reduced federal support and infrastructure spending
High public debt limits fiscal flexibility. As a greater share of federal revenue goes toward interest payments, less is available for:
- Infrastructure investment, a key driver of long-term property value growth;
- Housing programs and subsidies, vital for affordable housing supply.
In the deleveraging phase, governments often face politically difficult choices between austerity, debt restructuring, monetary expansion and redistribution. If austerity dominates, local governments may seek higher property taxes to fill funding gaps, directly impacting property owners’ holding costs.
4. Crowding out of private investment
When government borrowing absorbs more available capital, less is left for private borrowers. This is the “crowding out” effect. Historical analysis shows that during the late bubble and tightening phases, risk premiums rise, lenders become more selective, and credit creation slows sharply.
For real estate, this could mean:
- Fewer construction and development loans approved;
- Higher financing costs, especially in secondary and tertiary markets;
- Slower housing supply growth, worsening affordability.
5. Regional variations in impact
Not all markets will be affected equally. The debt stress is uneven, and vulnerabilities concentrate where debt burdens are highest relative to income.
In the U.S., that means:
- High debt-to-income metro areas are more sensitive to mortgage rate spikes;
- Regions reliant on federal contracts or infrastructure projects may see sharper slowdowns if spending is cut.
6. Debt cycles and real estate
The “archetypal big debt cycle” framework makes clear that real estate markets don’t move in isolation. They are deeply tied to credit conditions. In the bubble phase, cheap credit fuels rapid price appreciation and speculative building. In the tightening and deleveraging phases, higher rates, falling asset prices and reduced lending can cause sharp corrections in both property values and transaction volumes.
Importantly, a “beautiful deleveraging” is the optimal way to manage excessive debt and balance spending cuts, debt restructuring and moderate money printing to reduce debt burdens without triggering deep recessions or runaway inflation. The ability (or inability) of policymakers to achieve this balance will directly affect the trajectory of real estate markets in the coming years.
The link between U.S. national debt and real estate is not always immediate or obvious, but history shows it is real. Rising debt levels influence mortgage rates, inflation, public investment and private credit availability, all key determinants of housing affordability and property values.
For investors and developers, monitoring macroeconomic debt trends and positioning capital for potential tightening phases is essential. For policymakers, the challenge lies in sustaining housing supply and infrastructure investment while managing debt sustainably, avoiding the extremes of austerity-driven stagnation or inflationary instability.
Edd Hamzanlui is founding principal at MassCan Capital.
