How institutional investors can pivot in today’s housing market

The housing market is facing pressures from both sides, but for institutional real estate investors, disruption always creates a distinct set of opportunities.

The big picture shows a clear trend. Job growth is slowing across many U.S. metros, and inflation continues to ripple through the financial market. Mortgage rate forecasts suggest 30-year rates will stay elevated above 6.0% until mid-2027.

According to the University of Michigan Surveys of Consumers, which tracks how households perceive market conditions, both homebuyers and sellers think it’s a bad time to participate in the housing market.

But while consumer confidence is low, buyers seem to be accepting this new normal. Though they cite high rates and prices as obstacles, they cite them less than just a few years ago. This means there is demand for housing – though institutional investors will need to plan carefully to capitalize on it.

The hidden affordability crisis

Affordability metrics reflect some of the most challenging buying conditions on record.  The percent of income required to shoulder the cost of a new mortgage is around 30%.

On average, it takes about 4.5 years for median-income households to save for a 15% down payment. And those that are renting pay about 25% of their income on rent, making it difficult to save at all.

While affordability is often reduced to sticker prices and interest rates, insurance premiums and property taxes also play a role, and both are rising. In 20% of metro areas, these costs account for up to 40% of the monthly mortgage payment.

With that, demand for affordable housing has never been higher, pushing buyers toward attached properties like townhomes, which have an 8% lower median price than detached homes.

The legislative landscape

As market conditions change, the regulatory environment for real estate investment is also shifting. The 21st Century ROAD to Housing Act is the most significant federal housing legislation in decades.

For institutional investors, it introduces critical changes, prohibiting investors with 350+ homes from buying additional single-family homes. But strategic carve-outs are included: Existing portfolios are grandfathered in, and exemptions clear the path for built-to-rent (BTR), renovate-to-rent, and manufactured housing.

Other sections of the legislation expand FHA financing, encourage offsite production of manufactured homes, and streamline development of the “missing middle” – affordable housing that sits between detached single-family homes and large apartment buildings.

The built-to-rent opportunity

What does this mean for institutional investors? While many would-be buyers can’t afford to purchase a home, they still need a place to live.

Based on research from John Burns Research & Consulting – a company that leverages Cotality data for housing market reports – rental demand grows as home buying slows.

There are currently more than 46.8M rented properties in the U.S. For the 24 million renters in apartment buildings with more than 5 units, the industry builds over 400,000 new apartments annually. But few homes are built for the 14 million renters in detached and attached one-unit rentals.

While rising construction costs have limited BTR development in recent years, the current pipeline falls drastically short of predicted demand. This creates a market primed for investors who can navigate financing and build the communities renters are waiting for.

Data as the ultimate differentiator

Navigating housing market trends requires deep, property-level intelligence. Housing demand often follows regional employment growth, which varies widely. And with different areas in different stages of housing development, treating the U.S. as one market won’t work.

Investors need detailed data to understand local markets, analyze risks, and assess affordability. Cotality has solutions to solve key challenges for institutional investors, including:

• ‍Home Price Index Forecast: Projects future home values down to the regional level, allowing investors to target high-growth areas.
• ‍Climate Risk Analytics: Evaluates long-term environmental risks, helping investors model the long-term cost of property ownership.
• ‍CLIP ID: Links every deed, permit, and geospatial record associated with a property – even if it isn't listed in public tax databases yet.

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The old way of building a real estate portfolio has changed, but there is still room to grow if you know where to build, who you’re building for, and how to look past a property’s sticker price.

Want to dive deeper into the trends impacting institutional investors? This story just scratches the surface of what we covered in a recent capital markets webinar.

Watch the on-demand webinar to learn more or contact us directly to discuss how data can help you make confident decisions in a shifting environment.