Don’t Bet on the Fed: What Investors Need to Do Now as Rates Rise Again

0:00The Fed cut rates on Wednesday and mortgage rates went up. So what gives? Hasn't every person on the internet been saying that there will be lower mortgage rates because the Fed will cut rates? Well, I haven't. I've been saying mortgage rates aren't moving that much and that hoping the Fed will make investing easier is not a viable strategy for 2026. So today, I'll make this confusing situation make sense. Underneath all this noise about Fed rates, about mortgage rates and home prices, there is opportunity for investors. Let's unpack.

0:41Hey, everyone. Welcome to the BiggerPockets podcast. I'm Dave Meyer. Thank you for joining us on the show today. We have a good episode here for you. In today's episode, I will talk briefly about what happened this week with the Fed and why My thesis about rates has been right so far, but we're going to focus more on how to invest in an environment where rates might not be coming down. So first and foremost, I just got to say this. I get it. I know that people want mortgage rates to come down. I know that they want homes to be more affordable. I want homes to be more affordable, too. And I get that people have been eyeing Fed rate cuts as these magical periods where all of a sudden things are going to get easier.

1:25But hopefully now you see that that is not the case. Four times in a row now, when we have the Fed cut the federal funds rate, we've actually seen mortgage rates go up. Now, they've gone down leading up to those decisions, but hopefully you can see that these events, these magical days, don't actually exist. And I know that can seem confusing because there are a lot of counter narratives out there about how the Fed is going to push down mortgage rates, and then it doesn't happen. So I get that that can be really confusing. But if you listen to the show, you know I've been saying this would happen all year because people who actually study the housing market knew that this was a relatively likely scenario.

2:05So we're going to talk about that today, why rates haven't really budged and why it might not happen for a while. But I think focusing solely on rates in this episode is a mistake. It's important, but people are sort of obsessing over the wrong things. Instead, people should be focused not just on rates, but other fundamentals and how to invest even in this higher rate environment that we're in. People, in my opinion, should be focused on finding great markets, taking advantage of the better inventory levels that we have, using their leverage to negotiate great deals, positioning themselves for long-term growth.

2:43Because people have been investing in real estate for decades, for centuries really, and rates do what they do, But the real investors, they find ways to make it work regardless of the rate environment. And in today's episode, you're going to learn to do the same thing. All right, so first, let's talk about what actually happened. They cut the federal funds rate 25 basis points on Wednesday, the 29th of October. 25 basis points just basically means 0.25 percentage points, so a quarter of a percentage point. And this is basically a foregone conclusion. You know, there are actually markets where people bet on this stuff.

3:20It was actually like 100 % odds that this was going to happen. So this was not a surprise at all. And with that, we saw all these people on social media and honestly, in some of the regular media too, pointing to lower mortgage rates. But unfortunately, those people don't understand how this works. And that's okay, because it is kind of complicated. But let me explain to you how this actually works. The Federal Reserve controls one interest rate, and this does influence other borrowing costs, but what it impacts is short-term borrowing costs. In the world of finance, mortgages, the things that we as real estate investors care about, are long-term borrowing.

4:03These are long-term loans. And long-term loans are less influenced by the federal funds rate. Sometimes they do move together. Other times they don't, like in the last couple of years. They are loosely correlated, but that correlation has been weakening over the last couple of years. But there is something that we can track if we want to understand mortgage rates, and those are yields on the 10-year U.S. Treasury. That's why I talk about this. If you listen to our sister show On the Market, we talk about this a lot. And I should mention, if you like this kind of nerdy stuff where we dig into how these things really work, check out On the Market.

4:36We talk about this all the time. But I'll give you a high-level overview, which is basically that the yield on a 10-year U.S. Treasury is controlled by bond investors who are very different from real estate investors. These are people who manage pension funds or hedge funds or sovereign wealth funds or family offices, huge amounts of money. And what really moves the bond market are fears of recession and fears of inflation. When people are generally afraid of recessions, they put their money into bonds, and that lowers bond yields and takes mortgage rates down with them. When people are afraid of inflation, they demand a higher rate on bonds to lend money to the government, and that pushes bond yields and mortgage rates up.

5:18What's so frustrating, what's making this so hard for the housing market is that both of these things, inflation and recession, are riskier than usual right now. In a normal market, you're usually afraid of one or the other. If you're in a really good economy, you're kind of worried about inflation, things getting too hot. If you're in a bad economy, you're worried about a recession, things getting too cold. But it is unusual to be in the situation that we're in right now where there is fear of both, right? You have fear on both sides of the market. And that is sort of locked in bond yields in a way.

5:52The bond market is a bit stalled. It's kind of like having this tug of war where like half of bond investors are really worried about a recession. And then the other half are really worried about inflation and they're pulling against each other and no one is going anywhere. That's kind of what's going on in the mortgage market right now. So despite what happens with the federal funds rate, bonds just aren't moving that much. And that's why mortgage rates aren't moving as well. So yes, we got a rate cut from the Fed. That should actually help commercial real estate because that's a little bit more tied to short-term lending.

6:26But in the residential market for the majority of our investors here, the BP community or buying one to four unit properties, it's not going to mean more lower mortgage rates, at least right now. And just remember, as we get more rate cuts in the next year or so, because I do think we will get more rate cuts, that does not mean more mortgage rate declines. And you cannot count on that happening. I think that's the big takeaway right now is that no matter what the Fed does, it doesn't equate to better investing conditions for us. And so what we need to do is look at the conditions on the ground today and figure out how to optimize for the existing market, the existing rate environment, and still make good investments.

7:05Because that is absolutely possible unless you're getting distracted by the rates. So let's not get distracted by the rates. Let's not wait around for something that is completely out of our control. We got to take these things into our own hands. So that's what I'm going to do. And I know people do want to know what's going to happen with rates. So I will just say that for the rest of 2025, I'm expecting things to be pretty similar to what we've seen recently, probably low to mid sixes. We might see, unless we see like some big change, right? Like if we see some huge change in the labor market, if we see some huge change in inflation data, then mortgage rates could actually move.

7:43But that's going to be pretty difficult, right? Because the government is shut down. So we don't even have inflation data. We're not even getting half the labor market data that we normally get. So it'd be pretty hard for those things to move in any direction when we just don't have reporting on it. So most likely we're stuck with mortgage rates through the end of the year. I will be giving a forecast on mortgage rates for 2026 in a couple of weeks, but as of today, I don't see much changing in the next year. Which brings us to our main topic for today. How do you invest in a higher rate environment?

8:14We're going to get into that on a very strategic level, sort of big picture, but also on a super tactical level of the things that you could be doing each and every day to build a better portfolio, even in a higher rate environment. And we're going to do that right after this break. Stick with us. This week's bigger news is brought to you by the Fundrise Flagship Fund. Invest in private market real estate with the Fundrise Flagship Fund. Check out Fundrise.com slash pockets to learn more. Investing in real estate has always been smart, but it hasn't always been simple. Now, it's both, thanks to the Fundrise Flagship Fund.

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11:56welcome back to the bigger pockets podcast i'm dave meyer thank you all so much for being here i'm excited about this episode i feel like for years now the whole real estate investing community was talking about lower rates lower rates lower rates and i wish they were lower i wish things were more affordable but i'm hoping that by now people are seeing that the fed is not coming to save us and that means we have to do the work of figuring out how to make our portfolios work in a higher rate environment. And that is absolutely possible. So I am excited to talk about this because I think by the end of this episode, you're all going to see the opportunities that lie in front of us.

12:33Now, I want to sort of break down the rate thing and why people are so sort of obsessed with it right now. Rates matter because they are a critical function of affordability. That is the thing that is holding up the housing market right now. It is why we have low transaction volume. It's why we're shifting from a seller's market to a buyer's market. It's because things just aren't affordable. But rates aren't the only function of affordability. They are one of three sort of big variables that go into the affordability of a home. You also have home prices, of course, and you have wages, basically how much people are earning.

13:11And those three things combined are what make up housing affordability. Now, I'm going to say something that is probably going to surprise most people, but housing affordability has actually been improving just for the last couple of months and not for a long period of time. I think it's like three or four months in a row now and not by huge numbers. But even though mortgage rates haven't moved down in the way that a lot of people wanted or were expecting, we're still seeing improvements in affordability. And this comes from a combination of these three variables, right? We're getting slightly lower rates, actually more than slightly.

13:46In January, mortgage rates were at about 7.1. Right now, as of today, a day after the rate cut, we're at 6.25. So that's 0.9, right? Almost a full percentage point lower. So they've actually come down. That really does matter with cash flow and affordability. The next thing is we have higher wages than we did a year ago. They've been growing faster than the pace of inflation, faster than the pace of appreciation in most markets. That makes homes more affordable. And then on a national level, we have pretty stagnant or correcting prices. Some markets are down, some are up. But on a national level, we're seeing prices pretty darn close to flat.

14:23And if you look at them in inflation adjusted terms, they're down about 2 % from the peak that they were at in 2022. Looking at all those things together, that means we're actually getting better affordability. So this, even without the lower rates people wanted from this Fed rate cut is a good sign for the housing market. And personally, I think for at least the next six months or so, we'll have to see what happens after that. I think affordability is going to improve. Wage growth is still up a little bit. I'm a little worried about that with AI and the state of the labor market, but I do expect prices to decline modestly for at least the next couple of months.

14:58And although mortgage rates could go up a little bit, I doubt they're going to go up a lot. And so I think we're going to have at least stagnant affordability or modestly improving affordability. And that might not sound exciting, but that's after, what, five, six, seven years of affordability declining. So this is a good improvement. And I know some people want it to happen all at once. Personally, I don't. I think we need to get back to better affordability, but I'd rather have that gradually so there's not a lot of pain in the housing market. And that is starting. We don't know if it will continue for how long, but the signs and the data are there right now.

15:33And to me, that is pretty encouraging. But I am talking a lot about affordability because I think it's sort of the key to our investing strategy. I am talking now about how to make things work, how to build a successful portfolio in a higher rate environment. And affordability is sort of the key to investing right now. At least that's been my hypothesis, my thesis about investing over the last three years. And I'm sticking with it because it's been working for me. So yeah, things are getting a little bit more affordable, but on a broad, high level, it's not going to improve that much. And that does create challenges for investors, right?

16:10That does mean it's harder to get in. But it also means that we are entering a buyer's market. And who does that favor? Buyers or investors, right? So this is the key thing I want people to remember is there are trade-offs in every single market. The high rate environment that we're in right now, the trade-off is that things are more expensive and that is a real challenge. But it also means that you're going to have more leverage. You're going to be able to buy assets at a discount. You're going to be able to be patient. You're going to be able to get concessions from sellers. These are things that are absolutely in your favor.

16:45And so you just need to think about in that high rate environment, what is the market giving me? What are the advantages I have as an investor in this higher rate environment? Because there's never a perfect market ever. It doesn't exist. And so right now we're in just like every market, one with trade offs. And the trade offs are between, yes, things are less affordable, but I have all these other things that I can be taking advantage of. And those are the things you must take advantage of in order to be successful in this environment. So how do you invest in this higher environment? What are the literal steps that you should be doing?

17:18The tactics that you should be employing? step number one, you got to leverage what the market is giving you. You can't just wait around for market conditions to return to 2021. It's not going to happen. I've been saying this for years and I've been right. It's not going to happen, everyone. Instead, you got to adjust to what the market is today and think critically about how you can take advantage of the conditions the market is presenting to you. What does that mean? I said it before, negotiating leverage. This means you can be very patient. You can choose the deals, be very surgical with the kind of deals that you're looking for, and be really patient and really disciplined about only buying at the right price and getting the right terms on your deal.

18:04Next, look for great assets at better prices. You always want to do this. Everyone wants to buy prices at a discount. Everyone wants the place in a great neighborhood. You couldn't do that in 2021. It was super hard. You could not negotiate. You were buying whatever came on the market. And yeah, that worked out for some people, but it was really hard too in other ways. Deal flow was bad. The opposite is going to happen in this higher rate environment. We're going to get better deal flow, which means we can get better assets at better prices. And that's what you need to be focusing on. The other thing that I think is going to happen, maybe not in the next six months, maybe not in the next year, but over the next two to five years, cash flow prospects, I do think are going to get better.

18:48I expect, I've talked about this before, that we're going into a great stall where prices are going to be flat or modestly declining. Rent growth is pretty flat right now, but even during big corrections, even during the great recession, when prices declined a lot, rent stayed sort of flat. And if that happens again, prices go down, rent stay flat, that means better cash flow. If prices go down and rents go up, and I do think there is a decent chance that happens, that means much better cash flow prospects. So look for those opportunities to find great cash flow in a market that's offering potentially better cash flow than we've seen over the last couple of years.

19:24So that's step one, is really focusing in on what the market is giving you. That is the mindset that you need to take into this high rate environment. Don't see high rates as your enemy or something you have to battle. See it as just a shift and an adjustment that you need to make. Step two here is about affordability. Remember, I talked about, and you're probably tired of hearing me talking about affordability because I really just think it drives everything in the housing market. And although I said I don't think affordability is improving much on a national level quickly, I think it will get better over time, but it's going to take a little while, I think that relative affordability is extremely important.

20:07Now, let me explain what I mean by that. In any given city, there are areas that are more affordable than other areas. In any given state, there are certain cities that are more affordable than others. And I believe that areas that are affordable to the average person in that area, whether to people who are homeowners and homebuyers or people who are renters, are going to perform the best over the next couple of years. I think they are going to be more insulated against downside risk than other places. I think when things turn around and start heating up again, they are going to heat up the quickest.

20:43And so for me, I am always looking for relative affordability. Think about it this way. Could the average person living in this neighborhood or within this radius of this house afford this home? And if the answer is yes, you're gonna find that it is more insulated against any downside risk and probably has better long-term upside because pricing in a home or for your rents are all a function of demand. And demand comes from people being able to afford the product that you're putting out there. So yeah, you can make tons of money in luxury stuff, but there's gonna be less demand for that. There's gonna be less people who can afford the luxury stuff, right?

21:21You can still make money that way. But when you buy affordable stuff, That's sort of the most people can afford that product. And that's going to have the most demand. That's going to push up prices. That's just how supply and demand work. So think about that in your neighborhood. We got to take one more quick break. Stick with us.

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