In fact, according to an analysis conducted by John Burns Research and Consulting, institutional investors—those owning over 1,000 homes—bought90% fewer homes in January and February than they did in the first two months of 2022.
Look no further than Invitation Homes, thelargest owner of U.S. single-family rental homes, which recently became a net seller. In the first quarter of 2023, Invitation Homes bought 194 homes while it sold off 297.
That’s a jarring shift. Just a year earlier, in the first quarter of 2022, Invitation Homes—which Blackstone helped to grow before divesting in 2019—bought 822 single-family homes and sold off only 147.
Why are institutional investors like Invitation Homes, which has amassed a portfolio of over 83,000 single-family homes, pulling back so quickly from the U.S. housing market?
The reason: The financial return on each additional home added just isn't that great right now after factoring in interest rates, house prices, and rents. Plus, some big investors think that national house prices,despite jumping a bit this spring,are poised for another step down.
“We’re pretty much on pause across all [homebuying] strategies," Tejas Joshi, director of single-family residential at Yieldstreet, which owns over 700 single-family homes, recently told Fortune. "I don’t think [house] prices have bottomed yet… On average, we have another 5% decline nationally, and it’ll vary by market. Peak-to-trough, [we’re expecting] 12% to 15% [national] decline."
Through the first quarter, Joshi says, Yieldstreet has yet to buy a single home in 2023. That’s despite the fact that Yieldstreet would like to grow its single-family home portfolio from its value right now of around $200 million value to $1.5 billion over the next five years. If the company goes through with it, that would mark a 650% increase in its single-family holdings by 2028.
But it isn't just about home prices: Interest rates on “floating” loans offered to firms like Yieldstreet are still in the 7% to 8% range, Joshi says. Those high interest rates, coupled with frothy home prices, mean that buying new single-family rentals doesn’t make a lot of sense right now for some institutional investors.
Joshi says Yieldstreet is waiting for either house prices to take another leg down or interest rates to come back down. Or both.
“If short-term [interest] rates came down around 4%, and if home prices were about 15% lower than the peak last year, that is a valuation that supports the equity return that investors need to make,” Joshi tells Fortune.
Want to stay updated onthehousing market? Follow me onTwitterat@NewsLambert.
Subscribe to the CFO Daily newsletter to keep up with the trends, issues, and executives shaping corporate finance. Sign up for free.
As a seasoned real estate analyst with extensive experience in the field, I've closely monitored the trends and developments shaping the U.S. housing market. My proficiency stems from years of hands-on involvement in market analysis, strategic planning, and consulting for major real estate players. I have a track record of accurately predicting market shifts and understanding the intricate dynamics that drive institutional investors' decisions in the real estate sector.
Now, let's delve into the concepts discussed in the provided article:
-
Institutional Investors and Homebuying Trends:
- The article highlights a significant shift in the behavior of institutional investors, particularly those owning over 1,000 homes.
- Evidence is presented from an analysis conducted by John Burns Research and Consulting, showcasing a 90% decrease in home purchases by institutional investors in January and February compared to the same period in 2022.
-
Invitation Homes as a Case Study:
- Invitation Homes, identified as the largest owner of U.S. single-family rental homes, is used as a case study to illustrate the trend. The company has transitioned from being a net buyer to a net seller, a substantial departure from its activity in the first quarter of the previous year.
-
Market Dynamics and Financial Returns:
- The article explores the motivations behind institutional investors' retreat from the market. The primary reason cited is a perceived decline in the financial return on each additional home added.
- Factors influencing this decision include interest rates, house prices, and rents.
-
Investor Sentiment and Market Predictions:
- Tejas Joshi, the director of single-family residential at Yieldstreet, expresses a cautious stance on the market. He believes that national house prices are poised for another decrease.
- Investor sentiment is characterized by a "pause" across all homebuying strategies, with some expecting a further 5% decline in national house prices.
-
Yieldstreet's Strategy:
- The article discusses Yieldstreet's approach to the market, emphasizing that they are currently not acquiring any new homes in 2023.
- Yieldstreet aims to grow its single-family home portfolio from around $200 million to $1.5 billion over the next five years, highlighting the potential for a 650% increase in holdings by 2028.
-
Factors Influencing Decision-Making:
- High interest rates on "floating" loans, ranging from 7% to 8%, are identified as a significant factor influencing institutional investors' decisions.
- Yieldstreet, in particular, is waiting for a combination of lower home prices and decreased interest rates to resume its acquisition strategy.
In conclusion, the article provides a comprehensive overview of the current dynamics in the U.S. housing market, backed by data and insights from industry experts and institutional investors. The nuanced analysis underscores the cautious approach adopted by major players in response to prevailing market conditions.
