Wall Street issues chilling warning about real estate bubble as prices jump 35 percent higher than average
Wall Street has issued a chilling warning that US homes are selling for 35 percent higher than what they should be.
Real estate analytics firm Green Street Advisors studied the stock performance of two publicly-traded companies that own and rent out more than 137,000 single-family homes throughout the country.
Invitation Homes and American Homes 4 Rent are trading at a 35 percent and 20 percent discount relative to their net asset values (NAV), respectively, according to Green Street.
Essentially what this stock price to NAV discount means is that investors believe the homes owned by Invitation Homes and American Homes 4 Rent are overpriced.
An average home in the metro areas where Invitation Homes owns properties sell for $415,000, according to Green Street’s analysis.
The share price, which has tanked 10 percent in the last year, suggests that investors think $310,000 is what the company’s homes are actually worth.
Shares of Invitation Homes have traded at very large discount to its NAV since the Federal Reserve raised interest rates in 2022 to battle against inflation.
That gap has widened by 10 percentage points in the last year, at a time when the number of homes worth $1 million was higher than ever before.
Green Street believes a disconnect between public markets and private markets could give way for a major housing correction
If a gap between property values implied by stocks and private markets opens up and persists, it could mean a correction in the housing market is on the way, The Wall Street Journal reported.
A similar thing happened with publicly-traded office companies in the lead-up to the worst of the COVID-19 pandemic.
Investors saw what was coming and began to price in future upheaval in offices when jobs across the country shifted to remote work. Stock prices plummeted in that sectors as a result.
One example was Steelcase Inc., which manufactures furniture and cubicles for offices and other types of buildings.
The company’s stock began selling off as early as January 2020, when health officials first began warning about a novel coronavirus in China.
By March 13, 2020, when President Donald Trump declared COVID-19 a national emergency, Steelcase had lost more than 44 percent of its value since the start of the year.
Green Street believes a similar dynamic could be playing out in the housing market given the large-scale disconnect between investors and stubbornly high home prices.
‘Share prices are signaling that single-family-home prices are too high and are not sustainable,’ John Pawlowski, a managing director at Green Street, told the Journal.
John Pawlowski, a managing director at Green Street, said share prices of publicly-traded big landlord companies are a thing to watch, as it could forecast the direction of the housing market
He noted that a gap between public and private markets in single-family homes can last longer than a gap for commercial real estate.
That’s because home prices are set by the people who live in and are selling the home, not investors.
At this moment, Wall Street landlords are being remarkably conservative about expanding their portfolios.
In the third quarter of 2024, institutional investors that already own more than 1,000 properties were responsible for just 0.3 percent of all US home purchases, according to data from John Burns Research & Consulting.
If you remove the second and third quarters of 2020, when COVID-19 lockdowns essentially froze all activity in the market, big investors’ number of home purchases has dropped to a seven-year low.
Additionally, these big landlords are struggling to make profit when mortgage rates are staying elevated, even though the Fed has been lowering the federal funds rate since August of last year.
The average consumer can get a 30-year home loan with 7.04 percent fixed rate, according to data from Freddie Mac.
Large housing investors don’t have it much better, with them being able to borrow at about 6.25 percent.
Some of the biggest players, including American Homes 4 Rent, are circumventing this issue by building homes themselves, rather than buying an existing house.
There’s also the option to buy newly constructed housing units directly from builders at a discount.
If the biggest investors on Wall Street are hesitant to buy homes because of their price, it suggests that a broad swathe of ordinary people buying homes right now are overpaying by quite a bit.
