The Pandemic Housing Boom brought a wave of institutional investors, such as Blackstone and iBuyer giants like Opendoor Technologies, into the real estate market. Low interest rates, easy access to capital, soaring rents, and skyrocketing home values created the perfect storm for Wall Street. However, recent trends show that institutional homebuyers are now rapidly pulling back from the market.
An analysis by John Burns Research and Consulting revealed that institutional investors, those owning over 1,000 homes, purchased 90% fewer homes in January and February compared to the same period in 2022. One of the most prominent examples is Invitation Homes, the largest owner of U.S. single-family rental homes, which has recently become a net seller. In the first quarter of 2023, Invitation Homes bought 194 homes while selling 297. This is a stark contrast to the first quarter of 2022, when the company acquired 822 single-family homes and sold only 147.
Why are institutional investors like Invitation Homes, which owns a portfolio of over 83,000 single-family homes, suddenly pulling back from the U.S. housing market? The answer lies in the financial return on each additional home added. At present, the returns are not as attractive, considering interest rates, house prices, and rents. Furthermore, some large investors believe that national house prices, despite a slight increase this spring, are on the verge of another decline.
One investment firm, Yieldstreet, currently owns over 700 single-family homes and has not purchased a single home in the first quarter of 2023. The company aims to grow its single-family home portfolio from its current value of around $200 million to $1.5 billion over the next five years, marking a 650% increase by 2028. However, Yieldstreet's management is waiting for either house prices to drop further or interest rates to decrease.
High interest rates on "floating" loans, which are still in the 7% to 8% range for firms like Yieldstreet, combined with elevated home prices, make buying new single-family rentals unappealing for some institutional investors. These investors are holding out for more favorable conditions, such as short-term interest rates around 4% and home prices around 15% lower than the peak last year. These adjustments would provide the equity return investors need to make new investments worthwhile.
As the housing market continues to evolve, it's essential for potential investors and homeowners to keep an eye on these trends. The sudden retreat of institutional investors from the housing market serves as a cautionary tale, highlighting the need for a thorough understanding of market dynamics before making significant financial decisions.