Wall Street has issued a chilling warning that American homes are selling at 35 percent higher than they should be.
Real estate analytics firm Green Street Advisors studied the stock performance of two publicly traded companies that own and rent more than 137,000 single-family homes across the country.
According to Green Street, Invitation Homes and American Homes 4 Rent are trading at a discount of 35 percent and 20 percent, respectively, to their net asset value (NAV).
What this share price discount to NAV essentially means is that investors believe that Invitation Homes and American Homes 4 Rent homes are overpriced.
According to Green Street's analysis, the average home in the metro areas where Invitation Homes owns properties sells for $415,000.
The stock price, which has fallen 10 percent in the past year, indicates that investors believe the company's homes are actually worth $310,000.
Invitation Homes shares have traded at a very large discount to net asset value since the Federal Reserve raised interest rates in 2022 to combat inflation.
That gap widened by 10 percentage points in the past year, at a time when the number of $1 million homes was higher than ever before.
Green Street believes that a mismatch between public and private markets could give way to a major housing correction
If a gap between real estate values, as implied by equities and private markets, develops and persists, it could mean a correction in the housing market is underway, according to The Wall Street Journal.
Something similar happened to listed office companies in the run-up to the worst of the COVID-19 pandemic.
Investors saw what was coming and began to factor in future office turmoil as jobs across the country shifted to remote work. As a result, stock prices in those sectors plummeted.
One example was Steelcase Inc., which manufactures furniture and cubicles for offices and other types of buildings.
The company's shares started selling off as early as January 2020, when health officials first started warning about a new coronavirus in China.
On 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 beginning of the year.
Green Street believes a similar dynamic could be playing out in the housing market, given the large-scale divide between investors and persistently high house prices.
“Stock prices indicate that single-family home prices are too high and not sustainable,” John Pawlowski, president of Green Street, told the Journal.
John Pawlowski, director of Green Street, said the share prices of listed major landlords are something to watch as they can predict the direction of the housing market.
He noted that a gap between the public and private markets for single-family homes could last longer than a gap for commercial real estate.
That's because house prices are determined by the people who live in and sell the house, and not by investors.
Right now, Wall Street landlords are being remarkably conservative when it comes to expanding their portfolios.
Institutional investors who already own more than 1,000 properties were responsible for just 0.3 percent of all U.S. home purchases in the third quarter of 2024, according to data from John Burns Research & Consulting.
If you ignore the second and third quarters of 2020, when COVID-19 lockdowns essentially froze all market activity, home purchases by major investors fell to their lowest level in seven years.
Moreover, these large landlords are struggling to make profits while mortgage rates remain high, even though the Fed has cut the federal funds rate since last August.
According to data from Freddie Mac, the average consumer can get a 30-year home loan with a fixed interest rate of 7.04 percent.
Large residential investors are not faring much better; they can borrow at about 6.25 percent.
Some of the biggest players, including American Homes 4 Rent, are getting around this problem by building homes themselves, rather than buying an existing home.
There is also the option to buy new-build homes 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 group of ordinary people buying homes now are paying quite a bit too much.
