WALL STREET THINKS AMERICA´S HOMES ARE OVERVALUED / THE WALL STREEET JOURNAL

Wall Street Thinks America’s Homes Are Overvalued

As prices paid for the average single-family property hit record highs, big investors are taking a pass

By Carol Ryan

There is a shortage of single-family homes in the U.S., which could make that market more resilient. PHOTO: FREDERIC J. BROWN/AFP/GETTY IMAGES

The pandemic-era flood of Wall Street cash into family houses is drying up. Regular home buyers might welcome a bit less competition, but not the signs that they are overpaying.

U.S. single-family properties are the only type of real estate that has increased in value since interest rates began to rise in March 2022. 

After a brief dip in the months after the Federal Reserve’s initial hikes, house prices resumed their climb. 

Residential property values reached a record in July, based on the latest numbers from the S&P CoreLogic Case-Shiller Home Price Index.

Commercial real estate hasn’t fared as well, falling 16% in value since March last year, according to property research firm Green Street. 

Offices and malls face different pressures, but even U.S. apartment values are off more than 20% since last year’s peak. 

Investors spent billions of dollars buying U.S. single-family homes during the pandemic, lured by blistering rent increases as remote workers looked for more space. 

They have backed off as debt costs have risen and rent growth has moderated, making it harder to generate a decent investment return. 

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.

Listed real-estate investment trusts that specialize in single-family homes, such as AMH Homes and Invitation Homes, have either slowed their buying or become net sellers. 

For big corporate landlords that want to grow their portfolios, a better option than paying today’s high prices on the open market may be to build new homes from scratch.

The stock market is flashing another warning sign for house prices. 

Shares of U.S. single-family housing REITs trade at a 20% discount to their gross asset value, according to Green Street’s director of research, Cedrik Lachance. 

This is an indicator of where shareholders think the value of the homes in these companies’ portfolios are headed. 

Investors may be underestimating the housing market, though. 

There is a shortage of single-family homes in the U.S., versus a potential glut of apartments if all the projects currently in the pipeline actually get built. 

Rent growth is stronger for single-family homes than apartments.

Another reason why apartment values have corrected and single-family home prices haven’t may simply be who owns them. 

Corporate landlords own 68% of apartments in buildings with 100 or more units but only around 3% of America’s individual family homes. 

Big institutional investors “are typically focused on cash returns as well as changes in economic and financing conditions,” says Cohen & Steers analyst Jordan Flannery. 

For regular home buyers, these factors are only part of the purchasing decision.

Owner-occupiers are often insulated from tighter financial conditions because they have locked in cheap debt for years. 

Of all outstanding U.S. mortgages, 61% have a rate below 4%, according to UBS. 

This is strangling supply as owners who would like to sell up will probably sit tight to keep their mortgage costs low.

Home buyers’ budgets are stretched: The monthly cost of a new mortgage is now 42% of U.S. median household income—10 percentage points higher than on the eve of the 2008 housing crash, based on UBS’s analysis. 

With few buyers or sellers, the market might simply freeze.

It can’t be a good sign for house hunters that Wall Street is no longer showing up at viewings. 

Still, buying a home to live in is more than a purely financial investment. 

This makes the single-family sector different from other property—overvalued, certainly, but perhaps less vulnerable to a crash.

Assumable loans allow home sellers to transfer the more attractive rate they secured in the past to buyers.