Biggest investors in single-family houses: “We need to be patient and allow the market to reset.”
By Wolf Richter. This is the transcript of my podcast recorded last Sunday, THE WOLF STREET REPORT.
We’re now getting all kinds of commentary from housing industry insiders and big institutional investors in single-family houses. They’re talking about this during their earnings calls.
American Homes 4 Rent is one of them. The company was founded during the Housing Bust and bought up tens of thousands of single-family houses that it then rented out. In addition to buying houses, in recent years it has started building its own subdivisions with just rental houses, that are specifically built for rentals. The company received enormous amounts of funding over the years from investors, including when it went public via an IPO in 2013.
So American Homes 4 Rent, during its earnings call last week, said a bunch of things that we have already seen in the data. And the data coming from all directions has for months been pointing at a housing downturn.
There is now a huge supply of new houses for sale, in all stages of construction, over 9 months’ supply in total, according to the Census Bureau. In terms of the number of houses, by June, there were 463,000 new single-family houses at all stages of construction for sale, the highest since May 2008, and up by over 30%, from a year ago.
Homebuilders’ cancellation rates spiked to nearly 18% of their total signed contracts in July, more than double from earlier this year and last year, according to data from real estate consulting firm, John Burns. And this cancellation rate was even worse than the cancellation rate in April 2020, during the lockdowns.
The Census Bureau reported that sales of new single-family houses have plunged 17% from a year ago, and are just barely above the lockdown low of April 2020.
The National Association of Homebuilders reported that its index for foot traffic of prospective buyers of new houses plunged in June and is now down to levels not seen since 2014, except during the lockdowns in March and April.
Traffic is an indication of interest by buyers, and buyers have lost interest – at least at these prices.
Homebuilders reacted by cutting prices: 13% of the builders reduced home prices in June to boost sales “and/or limit cancellations,” according to the National Association of Homebuilders.
And based on Census data, prices of new houses have plunged 12% in the two months of May and June, as homebuilders are trying to sell their inventory that is piling up.
Similar thing with previously-owned houses, condos and townhouses that a homeowner or investor is trying to sell. Realtors have been complaining for months about the plunging foot-traffic and showings.
Sales of single-family houses nationwide dropped by nearly 13% year-over-year in June; and sales of condos and co-ops plunged by 25%, according to the National Association of Realtors. This was the 11th month in a row of year-over-year sales declines.
Just an example what to expect: Pending sales in California – an indication what future closed sales might look like – collapsed by 40%, according to the California Association of Realtors.
The sales declines have been accelerating, amid the surge in mortgage rates to around 5.5%, even as inventory is suddenly coming out of the woodwork.
Supply of previously owned homes listed for sale jumped to three months, the highest since August 2020, and up by 20% from a year ago. Supply has nearly doubled from the low in January. The bidding wars are gone.
In some major markets, unsold homes for sale have more than doubled in June, compared to June last year, and there are numerous major markets were listings have jumped by 50% or more.
So pent-up supply is suddenly showing up on the market. No surprise there. We knew it would happen because it always happens when the housing market turns.
Lots of people bought a home over the past two years without selling the prior home, and they now have two homes or three homes, and they’re not renting them out.
The sole purpose of not selling the homes that they moved out of was to ride up the huge price increases with their highly leveraged investments. And now that the price increases are ending, they’re trying to sell their vacant homes, and they put them on the market without having to buy another home to move into. And the so-called “housing shortage” just vanished.
It happens every time. For years there are claims of a housing shortage, and suddenly there’s not, and there’s plenty of supply, and new supply keeps coming out of the woodwork just as buyers have evaporated. All it takes is a downturn in the market.
The median price of previously owned homes across the nation still rose in June. But in some markets, prices have already dropped by substantial amounts and are down on a year-over-year basis. This includes the San Francisco Bay Area, where house prices were down on a year-over-year basis in three Bay Area counties, namely in San Francisco, San Mateo, which is part of Silicon Valley, and Contra Costa.
Sellers are still trying to get these aspirational prices, but many buyers are saying, forget it. And that’s why there is no meeting of the minds, and sales don’t happen if buyer and seller are too far apart.
In other words, price discovery is going on where sellers are having to discover at what price they can actually sell their home. And during the process, sales plunge, as we’re seeing, and sales will continue to plunge until sellers figure out where the buyers are, and buyers are a lot lower.
Sellers are responding: price reductions spiked by 50% in June from May and about doubled year-over-year, according to data from realtor.com.
This is part of price discovery: reducing prices and reducing prices further until a sale happens.
These price reductions are a reset – after the era of those ridiculous bidding wars. More sellers are coming to grips with a new reality: Prices have to go where the buyers are, and buyers are around somewhere, but they’re a lot lower.
So American Homes 4 Rent on its earnings call last week, said a whole bunch of interesting stuff about how it sees this housing market.
In the conference call, it said that it has slashed its purchases of single-family houses by 80% from earlier this year, to “allow the market time to recalibrate and stabilize.”
It said, though interest rates have risen, home prices have yet to come down enough.
It noted that inventories of previously owned houses and new houses are growing, and that, “the time that they’re sitting there is much greater.”
It said, “We’re starting to see some price discovery happening. But we’re still early in that process.”
It said that it’s receiving lots of calls that it wasn’t receiving previously, from owners of small portfolios of rental houses and even from national homebuilders with excess inventory.
But it said there is this gap between where it expects to bid and what the sellers have in mind. These sellers still want prices that “you would have seen in March.” And it said, “so people are realizing that the market is changing, and they are seeing if they can still get a deal done based on the old pricing.”
And it said, that there’s “still some time necessary to get those properties repriced into the current pricing arena with the current interest rates.”
And it said, “the pricing that we are seeing today is still March pricing and that needs to be adjusted.”
In other words, price discovery. Sellers are trying to discover where the buyers are but just haven’t come down enough yet.
And the CEO said: “Rates are going up and prices are coming down. It takes time. We are seeing inventories expand. We are seeing the length of time that homes are on the market expand. We are seeing national homebuilders’ inventories increase.”
He said, “It’s only been in the last two to three weeks that we’ve actually seen any price declines.”
He said, “it’s driven more by the West Coast, but not entirely. And we’re seeing some of those declines in the 10% to 15% range in markets like Seattle and Denver.”
He said, “we need to be patient and allow the market to reset.”
And he said, “It’s all about the fact that capital cost for us as well as for the individual homeowner has changed, and that’s got to get reflected in the marketplace.”
He said, “you can have people on the sidelines, but they also have to be able to afford the offering. And when you think about interest rates rising, and you go with a home mortgage from 3% to 5.5%, it’s a significant increase in the payment, reducing affordability.”
And he said, “So, we still have a fair amount of price discovery and it takes time to get the markets to stabilize. But they’re volatile.”
So, in response to this environment, the company slashed its purchases by 80%, and it’s waiting for prices to come down and for the market to reset.
And those are the pros. They’re not influenced by emotions or, you know, stages of life, as many homebuyers are. They’re just looking at these houses as an investment, and those houses aren’t making sense at current prices with current interest rates, and so these big institutional buyers with huge resources are largely walking away from the market.
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