As investor sentiment cools but deals move forward, BiggerPockets executive believes we're in 'the great stall'
As mortgage rates continue to creep toward the high 6s and all eyes are watching the Federal Reserve for its latest rate decision on Wednesday, more borrowers are settling into the idea of higher rates for a longer period of time. Those borrowers who have come to terms with the current market include investors as well as those looking for a primary residence.
One analyst who tracks investor sentiment closely has been watching this recalibration through three consecutive quarters of data, and what he is seeing is a market where expectations have cooled but deal activity has held steady, the share of investors counting on lower mortgage rates has dropped sharply, and the overall picture looks less like pessimism and more like acceptance.
Dave Meyer (pictured top), chief investment officer at BiggerPockets, said the data reflects a meaningful shift in how investors are approaching the market.
"Real estate investors are starting to accept the reality of the new housing market," Meyer told Mortgage Professional America. "For a long time post-2022, it felt like investors and homeowners were just waiting for things to go back to the way they were, where mortgage rates would drop, and things would be cheaper, more affordable. And that hasn't happened, nor do I think it's going to happen.
“I think people are just starting to accept that and are starting to get back in and start to participate in the housing market, but with more reasonable expectations about what the housing market can offer these days."
‘The great stall’
The market is seeing forces pulling in opposite directions. On the one hand, investors don’t see things getting better anytime soon. However, deals are progressing anyway. Meyer has a name for this trend.
"I have called this period we're in, and I think we'll be in for a while, the great stall," he said. "Nothing has really changed fundamentally in the last year. People are expecting things to stay the same. So it's not necessarily negative in terms of, ‘Oh, real estate investing is bad,’ or, ‘I don't want to participate.’ They're just not expecting a lot of change."
BiggerPockets’ latest survey data supports that framing. The company’s Q3 Pulse Index fell to 96 points, its third consecutive quarterly decline from 108 in Q1 and 102 in Q2, with the share of investors anticipating improvement in the next 12 months dropping to 19%, down from 35% last quarter, while 55% now expect conditions to stay roughly the same.
Meyer said while investors hope that conditions will get better, the current stability of higher rates provides a known framework to get deals done.
"We've reached a point in the market of stability, not the best market we've ever been in, but stability is a place from which investors can make decisions and can properly underwrite deals," he said. "I don't think we're in this period where we were for a few years, where rates were swinging wildly, and people are expecting things to change. And stability, in my mind, is a positive."
Despite the cooling sentiment, Meyer said most investors are not sitting on the sidelines but recalibrating their expectations and moving forward.
"Most real estate investors see real estate as a long-term game, as they should," he said. "If you wait six months, things aren't going to get better. So you might as well start that long-term journey now. In real estate, if you own an asset for 10 or 15 years, you're going to come out on top."
Where investors are looking
The survey's regional data shows the Midwest holding its dominant position, with 45% of investors naming it the region with the best investing conditions in Q3, ahead of Southeast and Florida at 22.5% and Southwest and Texas at 13%.
"The number of housing markets in the country that can produce positive cash flow on a regular basis is fairly limited, and they are mostly concentrated in highly affordable markets," he said. "The Midwest unsurprisingly holds many of the most affordable markets in the United States. They are also some of the more supply-constrained markets that haven't seen the explosion of building that a lot of the markets in the Sun Belt have seen."
The risk Meyer is watching is a lack of household formations. When financial strain rises, people double up rather than form new households, and that reduces demand for both purchased homes and rentals.
"When people are strained and have affordability challenges, the household formation rate tends to decline," he said. "That usually has a correlation with flat or declining rents. Rents don't usually go down that much. But I do think we can see flat rents for an extended period."
Meyer said the same cycle applies to investors, who need to adapt their expectations rather than wait for conditions to improve on their own.
"The main thing you need to do to be successful in this is not to stay out of the market or to wait, but to adapt to the appropriate expectations and market conditions," he said. "If you do that, you can be successful."
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