S&P Dow Jones Indices (S&P DJI) reported its March 2023 S&P CoreLogic Case-Shiller Indices on May 30.
According to S&P DJI, all three of its home price indices experienced month-over-month increases in March, the second consecutive month they’ve been higher since they started falling in June 2022.
“Two months of increasing prices do not a definitive recovery make, but March’s results suggest that the decline in home prices that began in June 2022 may have come to an end,” S&P DJI’s press release stated.
“That said, the challenges posed by current mortgage rates and the continuing possibility of economic weakness are likely to remain a headwind for housing prices for at least the next several months.”
The U.S. National Index experienced a month-over-month increase of 0.4% on a seasonally-adjusted basis. In addition, the 10-City and 20-City Composites saw increases of 0.6% and 0.5%, respectively.
As a result, according to S&P DJI, 15 cities experienced price increases in March, up from 12 in February, another sign housing prices may have bottomed.
One company that could benefit from rising prices is Invitation Homes (INVH), one of the country’s largest single-family rental businesses. However, you could also argue that rising prices could hurt its business.
I’ll look at both sides of the argument.
Higher Prices Equal Greater Resale Value
In the first quarter ended March 31, Invitation finished the quarter with 83,010 homes in its inventory, including 12,636 in Atlanta, its largest market. That’s down from 83,113 at the end of December. During the first quarter, it acquired 181 homes but sold 284.
If you consider the Shiller data from the introduction, you would think that Invitation’s average price paid of $342,019 for a house in the quarter would be higher than in Q4 2022. But that wasn’t the case. Instead, it paid $385,863 for the 150 homes it acquired in the fourth quarter, 11.4% higher.
There’s a logical explanation.
Its average was lower due to the number of homes bought in Florida. In the fourth quarter, it paid an average of $366,125 for 107 homes (71.3% overall) in the Sunshine State. In the first quarter, it paid $27,270 per home less than in Q4 2022. Florida purchases in Q1 2023 accounted for 85% of its home sales.
With Florida's new home prices less expensive than some other areas of the country, combined with the fact homebuilders have been selling inventory in bulk to investors like Invitation at a discount for some time, it makes sense for the price paid to be lower.
Approximately 24% of builders were cutting home prices in October, 500 basis points higher than in September.
“Right now, there's just too much product. Too many houses have been specced that are just sitting on the ground. And these builders really need to move these houses,” Yahoo Finance interviewed Kinloch Partners CEO Bruce McNeilage about his company’s investment in single-family rentals. “And folks like us in the institutional rental business are helping these builders by buying up the supply that they have right now.”
That was in October.
Should house resale prices continue to move higher, new home prices on a relative basis will remain attractive for institutional investors and home buyers alike.
On the flip side, as resale home prices increase, the value of Invitation’s home inventory increases. It’s a double-edged sword.
Rising Prices Means Greater Capital Outlay
In 2022, Invitation added 1,423 homes and sold 691, for 732 net homes added. The year before that, it added 2,938 and sold 734, for 2,204 net homes added, buying 3x as many homes.
The company wasn’t nearly as busy in 2022 buying homes as it was the year before. As a result, Invitation spent $562.1 million less on homes last year than in 2021.
To a certain extent, Invitation can buy where prices are lower, as it did in the first quarter in Florida, reducing its average outlay for its homes. However, it can only do that for so long. If the trio of indices mentioned in the intro keeps moving higher, there is no question that it will have to spend more or buy less.
In 2022, it chose the latter. Moreover, it appears to have continued this strategy through the first quarter.
The Bottom Line on Invitation Homes
The company’s Q1 2022 report saw revenues increase 10.8% to $590 million while net income jumped 30% to $120 million, a net margin of 20.3%. Its core funds from operations (CFFO) per share were up 9.5% to $0.44. In addition, its same-store net operating income increased by 5.0%, and its same-store occupancy was 97.8%, 50 basis points higher than in Q4 2022.
“Looking ahead, we remain bullish on our business, which is backed by the high-value proposition and exceptional service that we offer our residents, along with what we believe is the strongest balance sheet and liquidity position in the single-family rental sector,” said CEO Dallas Tanner.
While it would be tempting to sell more homes as home prices rise, the company isn’t just an investor in single-family homes; it’s also an operator and a landlord. The more inventory it has, the more attractive it is to renters across America.
Up more than 15% year-to-date, it is still well below its 52-week high of $40.20.
Ultimately, healthy home values are better for business, even if it means paying more for your inventory than if you’re looking at bargain-basement prices. That’s because as prices drift lower, so does the quality of homes available for acquisition.
It might not seem like it, but higher home prices are good for INVH stock.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
