Finally, Main Street consumers and Wall Street investors in single-family home REITs have come to a meeting of the minds — single-family homes are far too expensive.
The average sales price for homes in the U.S. was $502,200 in the third quarter of 2024. That’s up 31.2% from $382,700 in the same period in 2019.
Add rising mortgage rates, and buying a home is increasingly out of the reach of many consumers. Data from the National Association of Realtors on total existing home sales at a seasonally adjusted annual rate fell from about 6.60 million in January 2021 to 4.15 million in November 2024. House affordability has plummeted since 2021, according to the organization.
But while consumers and investors are both saying prices are too high, there’s a difference. Too few consumers can afford to buy a house. REIT investors are saying something different — that the properties REITs like Invitation Homes and American Homes 4 Rent own aren’t worth less than what they would sell for, wrote Carol Ryan for The Wall Street Journal.
Investors are voting through the stock market, which allows for a rapid approximate mark to market. Invitation Homes and American Homes 4 Rent are trading at a 35% and 20% discount respectively to their net asset values (NAVs) — the value of a fund’s assets minus the value of the liabilities. — according to data from CRE analytics firm Green Street, says the Journal. Of the Invitation Homes discount, 10 percentage points came into place during 2024.
Ryan noted that given Green Street’s analysis, if Invitation Homes sells a property in one of its metro areas for $415,000, the share price suggests investors see the value as $315,000.
Macroeconomics and investor moves during the pandemic helped push housing prices up enormously. Those dynamics made SFR such a strong market, separate from multifamily. Even as home-for-sale demand weakened, the SFR industry remained highly optimistic about the future, at least in October 2022.
"The macro-overlay is why residential is about 47% of our $7.2 billion portfolio," Allan Swaringen, president and CEO of JLL Income Property Trust, told GlobeSt.com at the time. "The reason we find that attractive is that America has not been building enough housing since the global financial crisis." The company has about 8,000 residential units, half multifamily and the other 4,000 are SFR. The single-family units represented about a quarter of that value.
However, market dynamics have changed. Ryan noted that the average American house is rated at a 4% cap. Given interest rates, large investors who can borrow at about a 6.25% rate need to buy at between a 5% and 6% cap to make deals pencil. And the 10-year’s last close was at a 4.61% yield, increasing the upward pressure on CRE mortgages.
The question is whether the housing market is in a bubble, in which case perceived valuations may ride far above actual asset values. Then, it’s a matter of time before enough air comes out of the inflation to make an investment sensible. According to the Journal, it would take a drop of about 10% to 15% in home prices to make investors reconsider single-family rentals.