What up everyone
As we’ve discussed in previous videos, investors played a huge role in inflating the housing market over the past 2 years and are now struggling to navigate the downturn in the housing market over the last 6 months.
We’ve seen Redfin, Zillow, Opendoor and other companies shut down their iBuying programs as investors scramble to offload their inventory before prices go down even more.
Bt this isn’t the whole story. There are still institutional investors like Blackstone who are just waiting on the sidelines for opportunities to buy more inventory at a discounted rate.
Just recently, Homebuilder Lennar reported a slowdown in new home orders in its fourth-quarter as the housing market remains in correction mode.
And on Dec 9th, Bloomberg reported that Lennar Corp., one of the biggest US homebuilders, is offering to sell thousands of homes to rental landlords at a time when sales to everyday buyers have slumped.
So today we are going to take a look at Bloomberg’s article- Lennar Offers 5,000 Homes to Investors With Buyer Demand Sliding as well as Fortune’s Intensified housing market correction has homebuilders offering sweetheart deals to Wall Street
And see what they are saying. This should be good – so lets dive right in
Lance Lambert writes in Fortune that Homebuilders have a housing downturn playbook that’s proven to be effective time and again. They start by offering incentives like mortgage rate buydowns.
If that doesn’t work, then builders begin to mark down home prices.
Fast-forward to 2022 and builders are trying to offload their inventory by selling to investors to rent out the homes rather than directly to buyers.
This is called “build to rent” and has investors looking for deals while builders are trying to minimize their losses.
Which brings us to Lennar who is selling approx 5000 properties, a potential value of roughly $2.5 billion, to institutional investors.
Many of the properties are located in the Southwest and Southeast, according to the Bloomberg article, with the builder giving landlords the chance to acquire entire subdivisions in some cases.
“What’s an interesting dynamic with the institutional investors is a lot of them have been sitting on the sidelines waiting for that moment to strike… [they’re thinking] ‘Hey, I want to buy these homes from you [the builder], but I want to have a discount to do so.’” Ali Wolf, chief economist at Zonda tells Fortune.
Wolf notes that these institutional investors don’t just want markdowns in the 10% ballpark, they’re hoping for “20% and 30%” price cuts.
Wolf tells fortune that since mortgage rates have come down from their peak of 7.3% in October, some institutional investors might be ready to pull the trigger.
“What we’re hearing now is that some investors, because mortgage rates have come down, they’re afraid that primary buyers are going to come back into the market. So some of the institutional buyers are trying to rush in now because they’re afraid that there will be a pop in demand from primary buyers and they’re going to lose their opportunity,” Wolf says.
And Lennar isn’t alone.
Patrick Clark, the writer of the Bloomberg article, spoke to Jeff Cline, the executive director of SVN- a private, commercial real estate investment firm dedicated to the Build-for-Rent asset class.
Cline said that In recent months, builders have sought bids from rental operators on at least 40,000 homes. Many of those properties had been under contract with individual buyers who walked away from purchase agreements.
He adds that builders are looking to sell one or more subdivisions at a time.
The reasons builders are going to investors is due to 2 reasons-
1- Too many cancellations by buyers. In October, the homebuilder cancellation rate (i.e. the percentage of buyers who back out of their contract) tracked by John Burns Real Estate Consulting spiked to 26%.
2- Surplus of inventory. Homebuilders still have a tremendous amount of inventory—both single-family and multi-family—in the pipeline.
Between the pandemic housing demand boom which pushed the number of US housing units under construction to a record high and cancellation rates spiking, builders are eager to offload their inventory.
So which institutional investors are going to buy these homes??
Clark writes that Single-family landlords have been eyeing builder inventories for months, with some, like industry giant Invitation Homes Inc. seeking to raise new funds to pounce on opportunities once interest rates and pricing comes down.
Lambert writes that While firms like Blackstone have made it clear they’d like to continue to grow their real estate portfolios, Blackstone-owned Home Partners of America, one of the nation’s largest private landlords, announced in August that it would halt single-family home purchases in 38 U.S. regional housing markets.
They did say they hope to resume purchasing homes in these markets in the future so if rates and prices come down, they may be a contender.
And then there’s Lennar. Lennar has also raised money to acquire rental houses, tapping Allianz Real Estate and Centerbridge Partners for $1.25 billion in equity commitments in 2021.
But Lennar, which plans to spin off a subsidiary that owns and operates single-family rentals and apartment buildings, has been a cautious buyer.
Lennar Chairman Stuart Miller said on a September call with investors. “Contrary to what you might have thought, we’re probably selling less to our own program and more to other SFR programs outside of Lennar.”
So I guess we will see in the near future which investor starts buying all of these new builds.
My concern is that if builders are offloading their inventory to build for rent institutional investors rather than real buyers, home prices will remain too high due to the lack of inventory and therefore more competition on each house that comes on the market.
And investors will control the residential rental market even more which could result in unsustainable rental prices.
Which ultimately will only exacerbate the affordability crisis.
What are your thoughts?