Has the Single-Family Home Market Peaked for Institutional Investors?

IRVINE, CA—Last week RealtyTrac reported that 96% of housing markets are better off than they were four years ago when foreclosures peaked in 2010 and that 80% of the housing markets were better off than two years ago in 2012, when median home prices hit bottom. Thirty percent were better off than six years ago in 2008, at the front-end of the Great Recession. So yea for beleaguered US homeowners. These statistics, however, are the latest data point in a larger trend that doesn't necessarily bode well for institutional investors that have been piling into the single-family home asset class in the last few years.

In short, it appears that buying activity for this asset class may have peaked in the second quarter of 2013, according to other RealtyTrac figures reported in the Wall Street Journal. Institutional investors bought 44,087 properties in Q4 of last year, a dramatic slide from 60,648 in the second quarter of 2013.

Rising home values-as illustrated by the improving housing markets-is the primary reason, of course. Also it will be interesting to see, after a few years worth of returns, whether actual operating costs for these companies are in line with their pro forma predictions. One challenge to this space is that maintenance and leasing will not benefit from economies of scale as multifamily assets do. And there is this: rents backing Blackstone's single-family home revenue stream dropped a disconcerting 7.6% between October and January.

Still, just because the buying activity may have peaked and the fundamentals are not quite where investors would want them, that doesn't mean this asset class will fade to black. Enough companies have launched, some of which have formed REITs, to fuel the capital markets pipeline for some time.

Last week, for example, Bloomberg reported that Colony American Homes is selling $513.6 million of bonds tied to rental payments associated with 3,399 properties in 20 metropolitan areas in seven states. It will be the second securitization in this space.

Another offering in the works is one by American Homes, which is working with Goldman Sachs.

Also Silver Bay reported in its financial results for 2013 that on January 16, 2014, it completed an amendment to its credit facility increasing its borrowing capacity to $350 million from $200 million. "The credit facility is being used for the acquisition, financing and renovation of properties and other general purposes," a sign that the company thinks it is still a buyer's market.

And Starwood Waypoint Residential Trust acquired Waypoint Fund XI, a portfolio of 707 single-family homes for $144 million, this month.

One reason for these companies' optimism is that the fundamentals driving multifamily growth are largely the same as those behind the single-family rental home market-and these may be more robust than even the most bullish observer believes.