The big landlords like American Homes 4 Rent that emerged from last decade’s foreclosure crisis have said their business models are immune to recession and may even outperform in bad economic times. The coronavirus pandemic offers a stiff first test of that claim.
So far, investors are betting that American Homes, which owns about 53,000 suburban houses, and its rivals can withstand the economic slowdown—at least better than home builders.
American Homes shares are off 8% this month, while most home-builder stocks have lost between 40% and 70%. Invitation Homes Inc., which owns about 80,000 rental homes, is down 28% in March.
“Single-family rental housing is well-positioned to prove its mettle as a countercyclical asset class,” Raymond James analysts wrote in a note to clients.
Invitation and American Homes executives have touted their business models—leasing family-size suburban homes in good school districts to relatively high earners with six-figure incomes—as largely recession proof.
“Housing is a need, a basic need,” Invitation’s finance chief, Ernie Freedman, said at a real estate investing conference in September. Though rent growth would likely slow in a recession, lease renewal rates typically rise in uncertain economic times, he said. “Things would certainly slow down, but we would hold up much better than you would see in other real-estate classes.”
“We are a perfect hedge in terms of real estate,” Invitation Chief Executive Dallas Tanner said.
On Feb. 20—before the Centers for Disease Control and Prevention said it expected the virus to spread in the U.S. but after the World Health Organization declared the outbreak an international public-health emergency—American Homes CEO David Singelyn held firm with predictions that the company’s bottom line was safe.
“We have never seen in one year where rental rates have declined on a national basis,” Mr. Singelyn told investors on a conference call. He said that while there could be a rise in delinquent payments, the company’s far-flung properties, sometimes viewed by investors as a costly liability, will be a strength. “We’ve got exposure spread across the entire country and so, on the top line of having the occupancy there and the ability to maintain our rates and even grow our rates, history tells us that we will do fine” he said.
Meanwhile, the pandemic has upturned the outlook for home builders. It had been rosy.
Home-builder stocks outperformed the broader market in 2019 en route to new highs. Builders started 2020 hammering away at new houses at the fastest clip since before last decade’s foreclosure crisis, aided by mild winter weather, low unemployment and rock-bottom mortgage rates that keep falling as policy makers try to stimulate economic activity. The only big thing that wasn’t working in builders’s favor was rising lumber prices driven by their own demand.
As recent as Feb. 26, Jefferies Financial Group Inc. analysts recommended buying shares of three big home builders, D.R. Horton Inc., Lennar Corp. and PulteGroup Inc.
“While the home builders have had a good run over the past year, the sector has unique characteristics such as its homogenous U.S. sales and improving affordability that are missing in other S&P 500 sectors,” they wrote.
Since then, those builders’ shares have each lost about 40%.
Raymond James analysts told clients on Monday that they spent the weekend visiting subdivision sales offices in Florida, where they are based. They observed upbeat agents, who were somewhat dismissive of the pandemic’s economic effects, but less-than-normal foot traffic in sales offices.’
“A global pandemic exploding upon our shores was perhaps the only imaginable event that could have derailed the 2020 spring selling season, which by most accounts, was off to a tremendous start,” they wrote.