These are scary times in the real estate industry.

Interest rates are more than two and a half times higher than at the start of 2022. Cap rates have risen, inflation remains defiantly high, insurance premiums have skyrocketed, and occupancy rates are declining.

That sets the stage for falling property prices and rents in a paralyzed housing market. Home sales have plummeted as 93% of homebuyers and 95% of sellers regret their transactions this year.

But where are property prices declining, and by how much? Where are rents falling? And how should real estate investors respond to today’s market uncertainty?

I'm glad you asked because I love interactive maps, and we can pick through several.

Cities With Falling Property Prices

First, it’s worth noting that most U.S. cities have not seen declining real estate prices over the past year. So don’t panic just yet.

Still, a sizable number have seen home values decline, either annually or quarterly. And both numbers rose in the third quarter of 2023 after slimming in the second quarter.

Year-Over-Year Price Declines

Of the roughly 900 cities Zillow tracks, 244 experienced a drop in home prices over the last year. While still a minority, that still amounts to around 27% of U.S. cities.

You can view all 244 of them below, along with their median home prices and the annual drop in value:

That marks a rise from the 200 cities that saw annual price declines at the end of the second quarter.

Quarterly Home Price Declines

Over the third quarter, 153 cities saw home values decline:

While a jump from the 95 cities that lost value in the second quarter, it still marks an improvement over the first quarter, when 224 cities saw quarterly price declines.

Cities With Falling Rents

Real estate prices do drop sometimes, such as during most recessions. But rents rarely dip, even during recessions, as some homeowners become renters and add to rental demand.

That makes it extra scary when you see rents fall, as we’ve seen in the following markets:

Fully 78 of the top 350 cities experienced declining rents over the third quarter. But annually, the numbers don’t look as stark, with only 14 cities seeing rent declines:

The worst of those annual rent declines—Austin, TX—was only 2.79%. Hardly cataclysmic.

Still, you have to wonder if the last quarter’s data represents a broader trend, and we’ll see more rents fall in the coming months.

Should Investors Fear Falling Property Prices and Rents?

As an eight-year-old going rock climbing for the first time, I asked the instructor, “Are rock climbers not afraid of heights?”

He replied, “Climbers have a respect for heights.”

Should you lock yourself in your basement and stop investing in real estate when markets get tumultuous? No. As Warren Buffett famously said, “Be fearful when others are greedy and greedy when others are fearful.”

Watch out for the hidden bear.

At the same time, you need to have respect for the turmoil in today’s markets. You need to bring caution and conservative underwriting to investments at all times, especially when markets are as uncertain as they are right now.

Some of the best bargains come when everyone else is terrified of real estate. Look no further than the stretch from 2009 to 2013. I bet you wish you could buy properties today for what they went for then. But at the time, most people had nothing positive to say about real estate.

How to Invest in Tempestuous Times

All investments in all markets come with risk. You can’t avoid it entirely, but you can take steps to mitigate and manage risk.

As you explore investing in this market, whether in flips, rentals, real estate syndications, crowdfunding, or alternative investments like land, keep the following tips in mind.

Review Local Market Fundamentals

Just because a city has been good to your real estate investments for the last five years doesn’t mean it’s a good market for investing in a world beset by falling property prices and rents.

What’s the population growth rate in that city (a.k.a., demand)? What’s the job growth rate (a.k.a., a predictor of future demand)? At what rate are new housing units being built (a.k.a., supply)? What’s the occupancy rate in that city?

In other words, will there be a housing shortage or oversupply two years from now?

Only invest in markets where you feel confident—based on hard data—that there’s a housing shortage and it’s not going away any time soon.

RELATED: The American Dream Dilemma: The Unaffordability of Homeownership

Play the Long Game

Remember the stat from the introduction: 95% of home sellers this year regret selling.

It’s a bad market for selling right now. It might remain a bad market for sellers for a while. That means you should prepare for holding properties long-term, at least five years.

Play it like a game of 4D chess. No, seriously.

In turn, that means properties you buy today need to cashflow well. Selling may not be easy or profitable for years, so keep income front-of-mind as you evaluate deals.

Beware of Spiking Expenses

I’ve heard countless horror stories of insurance premiums leaping by 100% or more over the last year or two. That can crush your cash flow.

Nor are they the only expense shooting through the roof. Property taxes have exploded post-pandemic as counties reassess values. Labor costs for repairs and maintenance have risen sharply. And continued high inflation keeps driving up material costs.

That makes forecasting cash flow tricky. Imagine buying in a market where rents are declining, but all your expenses keep jumping. Within a year, a property could become cashflow-negative.

Now do you get why I stressed rechecking your market’s fundamentals? As you play the long game, use extra caution.

Use Leverage Carefully

Even in the best of times, leverage is a double-edged sword. And this is certainly not the best of times for borrowing.

If you don’t want to get cut, again, use extra caution when approaching loans. Get more comfortable with creative financing options, such as assumable loans, seller financing, wraparound mortgages, private loans from friends and family, and more.

Better yet, buy in cash.

Avoid traditional mortgages and portfolio loans if you can.

Real estate investors who can buy in cash or negotiate low-interest loans privately can find plenty of opportunities to make money in a challenging market. Investors who rely on more traditional financing will have a harder time finding deals that cash flow well.

As a parting (and terrifying) visual, here’s how interest rates have changed since late 2021:

Is the End Nigh for Real Estate Investors?

Of course not. When the market is bleak, you can often find the best deals.

If you know where to find and fund them.

With declining property prices and rents, investors have less competition from homebuyers, with so many of them either locked in their current homes or unable to afford high-interest mortgages. For that matter, they have less competition from other investors, many of whom don’t know how to use creative financing. Again, that creates opportunity.

But today’s market also has some very real dangers. Proceed with caution, stay conservative, and above all, don’t make any assumptions about where interest or cap rates are headed over the next few years.

Happy Halloween!