Investors have contributed to the rise in home prices and the lack of inventory by purchasing homes and turning them into rental properties. U.S. single-family properties reached a record high in July despite the Fed’s long series of aggressive interest rate increases since March 2022.
Homes have been the only corner of the real estate market that has increased in value in the last year. Commercial real estate has fallen 16% since March 2022. Offices and malls have faced other kinds of challenges, but even apartment building values are down 20% from last year. 1.
Now Investors Want Out
Billions of dollars worth of single-family homes were gobbled up by Wall Street during the pandemic. The change to remote work allowed many people to move to more affordable or more desirable locations. Investors were also enticed by dramatic rent increases and found that buying homes and turning them into rentals brought ever-increasing revenue – for a while.
Now, REITs (real-estate investment trusts) that invest in single-family homes have stopped buying or are selling.
Investors face higher debt costs, and rent growth has slowed down. According to data from John Burns Research & Consulting, large landlords bought 0.4% of U.S. homes in the second quarter, down from a peak of 2.4% at the end of 2021. 1.
REIT shares have declined, so they trade at a 20% discount to their underlying asset value. Does this mean that investors think that single-family homes are 20% overvalued? It might, or more probably it means that investors don’t want to risk any significant drop in home values to come in the foreseeable future.
Homes VS Apartments
Apartment rent growth has not been as robust. There could also be downward pressure on apartment rents if all the projects already approved end up getting built.
The disparity is in part due to the fact that nearly 70% of apartments consisting of a hundred or more units are owned by corporations. Corporations only own about 3% of single-family homes.
Corporate apartment owners have to adjust to changing economic circumstances, including interest rates, relatively quickly. Home buyers are affected by these things when buying, but not as much over time. Just over 60% of home buyers have a mortgage rate below 4%. This provides a deep incentive not to move and then take on new financing at possibly 3% higher.
Challenging Times for Housing
The market for single-family housing will likely remain challenging for the foreseeable future. The Fed has signaled that interest rates will stay higher for longer, even if increases have stopped. That means that individuals and corporations will have less incentive to take on the cost of a new property.
Some corporations may find it’s a better time to build brand new homes rather than pay the high prices of homes on the open market. Carrying financing of any kind will be a disincentive, however.
Until Fed policy changes, we can speculate that home remodeling will have better momentum in the near term as homeowners are locked in.