The government has begun subsidizing the institutionalized single-family rental market, signaling an endorsement of Wall Street’s buy-to-rent housing bet as homeownership lags.
Fannie Mae — a government-controlled mortgage guarantor that helps keep mortgage rates low for homebuyers — has agreed to guarantee up to $1 billion in debt backed by single-family rental homes owned by Invitation Homes, a company operated by private-equity giant Blackstone.
If Fannie Mae regularly backstops this sort of debt, it could fuel the conversion of more owner-occupied homes into rental units by making it cheaper for institutional investors to buy or hold such properties.
Could FHA be next?
“This move means to me that FNMA [Fannie Mae] acknowledges that homeownership is not the only place to have a positive impact on U.S. housing,” said Greg Rand, CEO of OwnAmerica, a platform that institutional investors use to manage single-family rental portfolios.
“I expect FHA [Federal Housing Administration] to follow close behind, with both [FHA and Fannie Mae] offering better terms to landlords at all levels,” added Rand, formerly a managing partner at New York City-area brokerage Better Homes and Gardens Rand Realty.
Providing support to institutional rental investors
Fannie Mae and its smaller twin, Freddie Mac, have long kept borrowing costs low for everyday homebuyers by reducing risk for investors who buy bonds (known as mortgage-backed securities or MBSs) comprised of conventional mortgages.
They do this by promising to make investors whole if these bonds underperform (which can happen if too many of the bond’s underlying loans default). Fannie Mae has also offered this financing boost to mom-and-pop rental investors and apartment investors, including institutional investors.
By agreeing to guarantee Invitation Homes’ debt, Fannie Mae has now signaled a readiness to provide similar support to institutional rental-home investors.
Invitation Homes disclosed the deal at an opportune time: It’s about to go public, perhaps as early as next week, according to the The Wall Street Journal.
“This transaction helps us gather data and test the market to ensure we are delivering the right solutions that meet the increasing demand for single-family rental housing across all demographics,” Fannie Mae told The Wall Street Journal.
The institutional investment rental market
Institutional investors including Invitation Homes, America Homes 4 Rent and Colony Starwood Homes have bought and refashioned hundreds of thousands of formerly owner-occupied properties into single-family rental homes.
Such homes have become an increasingly popular housing option for Americans as homeownership has moved further out of reach for many. Highlighting this shift, the homeownership rate dropped to its lowest point in more than 50 years in 2016.
During the housing slump, institutional investors blanketed markets with cash offers, making it more difficult for everyday homebuyers to compete but also helping drive the recovery.
Then they got more creative.
- First, they raised debt to buy more single-family rental homes.
- Second, they packaged that debt into bonds and sold them to other investors.
- Third, they began offering financing for smaller investors to buy single-family rentals, as they scaled back their own purchases.
- Fourth, they packaged some of that debt into bonds and sold them to other investors.
By guaranteeing single-family rental bonds, Fannie Mae could increase the returns of the second investing strategy mentioned above.
In the same way that Fannie Mae “helps lower the interest rates paid by homeowners and other mortgage borrowers,” backing debt collateralized by rental units owned by institutional investors should put downward pressure on their borrowing costs.
“Lower cost of debt means more affordable rents,” Rand said. “Better terms for landlords means more rental stock available.”
Competition for low-income homeowners?
But Fannie Mae’s new support for single-family rentals could also encourage institutional investors “to continue to compete with lower-income prospective homeowners for purchasing properties,” writes Susan Webber, a principal of Aurora Advisors Incorporated who uses the pen name Yves Smith.
“A robust market for rental-backed securities means longer hold times for owners of rental property, which contributes to more housing stability for families,” counters Rand. “Landlords are not villains.”
Following in apartment market’s footsteps
Gary Beasley — a former co-CEO of Starwood Waypoint Residential Trust (which has merged with Colony American Homes to create Colony Starwood Homes) — says the single-family rental sector is following in the footsteps of the apartment market.
“I’m not surprised that Fannie decided to do this, as agency guarantees have been in place for some time on multi-family loans, which one might argue unfairly advantages owners of apartments vs. investors owning ‘distributed apartments’ in the form of scattered-site single family rental properties,” said Beasley, who now heads up Roofstock, a platform designed to help investors trade single-family rental homes.
“It is easy to forget, but just 25 years ago the entire public REIT [real estate investment trust] market for apartment REITs was only about $100 million,” he added, using the term for publicly traded real estate investment companies. “Today, the sector exceeds $100 billion!”