Invitation Homes’ Troubling Deal
Fannie Mae’s single-family rental investment worsens inventory and affordability problems.
September 13, 2017
When Fannie Mae announced a financing agreement earlier this year with Invitation Homes, the nation’s largest owner of single-family homes for lease, to back $1 billion in single-family rental properties, the National Association of REALTORS® was among the first to cry foul. As part of the transaction, the secondary mortgage market giant guaranteed financing that Wall Street–backed Invitation Homes would use to buy single-family homes and transition them into rental properties.
In a letter to Federal Housing Finance Agency Director Mel Watt—whose agency has oversight over Fannie Mae—NAR President William E. Brown said that instead of fulfilling its duty to serve average buyers, “Fannie Mae is actively financing large institutions to compete with them.”
NAR leaders have long spoken out about how the low housing inventory is driving up prices and creating steep barriers to homeownership, especially for first-time buyers. Brown says arrangements like the one between Fannie Mae and Invitation Homes may exacerbate the housing shortage, with rents continuing to spike as inventory continues to be taken off the market.
According to public filings, Invitation Homes will purchase single-family homes in California, Florida, North Carolina, and other areas with limited supply. NAR’s Chief Economist Lawrence Yun sees Fannie’s involvement in large-scale -single-family rentals as perilous for housing markets. “Deals like these are going to lead to more investor purchases, and further draw down inventory,” says Yun. “And generally, where there is an inventory shortage, there is a rental shortage as well.”
Yun is also concerned that such an arrangement would undercut the mission of Fannie Mae, adding that it represents “overall bad policy at a time when we have a 50-year low in homeownership.”
Invitation’s deal with Fannie Mae complicates Fannie’s duty to the public. Home sellers have little incentive to accept a financed offer from an individual buyer when an all-cash offer from a large institutional investor is on the table, NAR leaders say. Brown added that with Fannie Mae’s $1 billion investment, Invitation Homes effectively enjoys the same government support as an everyday home buyer. “Our nation needs the GSEs to bolster homeownership opportunities for millions of responsible, middle-class American families,” Brown says, “not funding special-interest deals with Wall Street financial firms that take away those opportunities.”
Charlie Dawson, NAR’s managing director of regulatory policy and industry relations, says that NAR has no objection to a firm like Invitation Homes investing in single-family rentals, calling this “run-of-the-mill” real estate activity. The problem, Dawson said, lies with the government’s support for that activity. “As a publicly traded company, Invitation Homes and its Wall Street backers have access to capital that most individual buyers could never dream of,” Dawson says. “They don’t need Fannie Mae’s support, but mom-and-pop buyers do.” As of July of 2017, Invitation Homes reported a market capitalization exceeding $6 billion.
For its part, Fannie Mae defends the transaction with Invitation Homes in terms of its own bottom line. In a public filing with the Securities and Exchange Commission, the company outlined a strategy of investing in markets they believe “will … exhibit constrained levels of new-home construction. As a result, we believe our markets have and will continue to outperform the broader U.S. housing and rental market in rent growth and home price appreciation.”
That potential isn’t lost on Fannie Mae rival Freddie Mac, which recently announced a single-family rental investment of its own, albeit with much smaller, so-called “middle market” partners.
On its first-quarter 2017 earnings call, Fannie Mae CEO Tim Mayopoulos noted that single-family homes make up more than half of all the rental units in the United States, describing the Invitation Homes transaction as a response to that enduring demand. “While there’s lots of talk about millennials wanting to move to big cities and live in apartment buildings, the fact is that all of our research indicates that many renters want to rent single-family homes,” Mayopoulos said, “because they like the lifestyle; they like living in communities where they have access to yards and bigger houses.”
Mayopoulos acknowledged the challenges related to the country’s limited housing supply. Blaming high costs of labor and land acquisition among the factors holding back new construction, Mayopoulos added that low inventory is especially hard on first-time buyers.
Whether Fannie Mae or Freddie Mac will pursue similar deals in the future remains an open question. Asked for comment about its intentions, the FHFA pointed to a recent blog post by one of its staffers, Maria Fernandez, who wrote that those transactions offered opportunities to “test and learn” about the market,
Updated: July 20, 2018