The intensifying housing market correction has made construction firms providing attractive deals for Wall Street
The builder has a housing recession drama that has proven to work time and time again. They start by offering incentives like buy back mortgage interest. If that doesn’t work, builders begin to reduce the price of homes to the community until their unsold inventory is shipped.
Fast-forward to 2022 and homebuilders are clearly back in their housing downturn playbook, with just one new wrinkle: investment organization. In the years following the housing bust of the 2000s, Institutional investors like Blackstone saw an opportunity to buy more directly from troubled builders. The expansion in this so-called “build to rent” category meaning that builders, during this period, floated massive discounts to Wall Street buyers.
Last week, Bloomberg reports giants built that house lennar will begin buying 5,000 unsold properties—a larger amount than the entire total active inventory in Kansas City—for institutional investors. In some of these Southwest and Southeast communities, investors will have the opportunity to purchase entire subdivisions at a discounted price.
“The interesting thing for institutional investors is that a lot of them have been sitting on the sidelines waiting for that moment to happen… [they’re thinking] ‘Hey, I want to buy these houses from you [the builder]but I want a discount to do so.’” said Ali Wolf, chief economist at Zonda Luck.
Not only do these institutional investors want a 10% discount, Wolf said, but they are also hoping for a “20% and 30% discount.”
One side, Current 30-year average fixed mortgage rate (6.28%) means housing market downturn still very much alive. On the other hand, the decline in the average 30-year fixed mortgage (down from 7.3% in early October) means housing demand may bottom out. That’s why, says Wolf, some institutional investors may be willing to pull the trigger.
“What we are hearing right now is that some investors, because mortgage rates have fallen, are afraid that primary buyers will return to the market. So some institutional buyers are trying to jump in right now because they’re afraid that demand from primary buyers will increase and they’ll lose their chance,” Wolf said.
Why are homebuilders like Lennar looking to investors now? There are two big reasons.
The first day, the ongoing housing adjustment has increased in recent months. When mortgage rates floated around 7% in October, homebuilders’ cancellation rates (i.e. percentage of buyers pulling out of their contracts) were tracked by Real Estate Consulting. John Burns has skyrocketed to 26%. That rising rate of contract cancellations—along with a weakening housing market in the spring of 2023—means that builders are discounting faster and offering more attractive deals to investors. Can buy in bulk.
Second, homebuilders still have a large amount of inventory—both single and multifamily—pending. One Booming housing demand during the pandemic along with push supply chain problems number of US housing units under construction to a record high this year. Now, with cancellation rates skyrocketing, builders are eager to sell this backlog before construction is completed.
In the future, Wolf expects historic pipeline of unfinished houses will continue to reduce new home prices through the first half of 2023. But once the inventory has been cleared and the process is under control, the pressure on new home prices should ease.
How many of these homes will go to institutional investors? Hard to say.
While firms like Slat have made it clear that they want to continue to grow their real estate portfolio, some institutional buyers have also temporarily move to the sidelines in the face of an ongoing housing adjustment. Look no further than Home Partners of America owned by Blackstone, one of the nation’s largest private landlords, which announced in August that it will pause to buy single-family homes in 38 US regional housing markets.
There is also the fact that companies like Slat and star wood announced plans earlier this month to limit withdrawals from their real estate funds. It is unclear how the continued increase in buyback requests from investors will affect their future real estate investment plans.
While housing recession There are certainly home builders scrambling to move inventory, that doesn’t mean we should write the apocalypse for builders.
Just look at the stock market.
While the major homebuilders are all down from their 2022 highs, they’re still well above January 2020 stock prices. That includes builders like Dr. Horton (+72.9% as of January 1, 2020), Lennar (+67.4%), fee for you (+30.2%), NVR (+28.5%), and Pulte group (+21.8%). During the same period, the S&P 500 Index rose 22.5%.
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