Here’s what falling house prices mean for inviting homes

Home price appreciation appears to be stalling, and even declined overall in July, according to the Federal Housing Finance Agency’s (FHFA) house price index. The drop comes after a combination of rising house prices and rising mortgage rates over the past year combined to really threaten housing affordability. The double-digit house price appreciation (fuelled, in part, by falling interest rates) that we have seen since the start of the pandemic has become unsustainable. Rates reverse and home price appreciation reverses accordingly.

How will the inevitable fall in property prices affect Invitation houses (INVH -0.33%)?

Image source: Getty Images.

Invitation Homes disrupts single-family rentals

Invitation Homes is a Real Estate Investment Trust (REIT) specializing in single family rentals. It owns more than 80,000 single-family rental properties in 16 markets. As a competitor American Homes 4 Rental (AMH 0.34%), the company is looking to consolidate what was historically a very fragmented industry of family owners who would each operate a rental property or two. Invitation focuses on locations with various economic drivers, including high barriers to entry and potential house price appreciation. The Company is focused on Southeast and West Coast properties. His typical property is a three-bedroom/two-bathroom home of approximately 1,870 square feet.

Rents correlate with house prices, but with a long lag

The big question is what falling house prices mean for residential REITs. Theoretically, falling house prices mean falling rents, but there is a long lag between rent prices and house prices. According to one study, rent price inflation typically lags house price inflation about 21 months. This would indicate that any decline for Invitation Homes is at least two years away. This is mainly because rents are reset once a year, so leases that are expiring right now were set when house prices were about 20% lower. These leases will be reset at market rates.

The other question is how this affects Invitation’s portfolio of homes. The short answer is that it will have no impact on the financial statements. Invitation reserves its homes at cost less depreciation and amortization, and it has not been revalued upwards. That’s one of the attractive things about single-family REITs like Invitation and American Homes 4 Rent: their book values ​​underestimate the true values ​​of their underlying real estate portfolio.

Invitation Homes has raised its outlook for its second-quarter earnings call

During the company’s second-quarter earnings conference call, Invitation raised its forecast for funds from operations (FFO) per share for the year 2022. REITs tend to use FFO instead of earnings per share. action to describe the benefits. Indeed, depreciation and amortization is a major non-cash expense for real estate companies. Although depreciation and amortization is a mandatory charge to earnings under generally accepted accounting principles (GAAP), it is a non-cash charge which means that net earnings underestimate the actual cash earnings of the business. ‘company.

The new guidance for Invitation Homes is that the 2022 FFO per share will be between $1.66 and $1.72 per share. This gives the company a price-to-FFO ratio of 20 times the guided FFO per share. This is a reasonable multiple for a REIT. The 2.5% dividend yield is low for a REIT, but Invitation has reinvested excess cash back into the business.

The bottom line is that any decline in house prices will have minimal effect on the Invitation stock in the short term.

Brent Nyitray, CFA has no position in the stocks mentioned. The Motley Fool holds positions and recommends Invitation Homes Inc. The Motley Fool has a Disclosure Policy.

Previous Why the Term Plan Works Better for Home Loan Liability
Next What's right for you?