Wall Street Thinks U.S. Homes Are Overpriced

House prices in the U.S. might be significantly overvalued—by as much as 10% to 35%, according to Wall Street's valuation models. The disconnect between public market valuations and private sales suggests that a housing correction could be on the horizon.

The Growing Gap in Housing Valuations
Shares of single-family landlords like Invitation Homes and American Homes 4 Rent are trading at steep discounts to their net asset values (NAV). For instance:
- Invitation Homes is trading at a 35% discount to NAV.
- American Homes 4 Rent is trading at a 20% discount.

While the average home in metro areas owned by Invitation Homes is valued at $415,000, its share price implies a much lower valuation of $310,000 per property, according to real-estate analytics firm Green Street.

“Share prices are signaling that single-family-home prices are too high and are not sustainable,” said John Pawlowski, a managing director at Green Street.

Why Wall Street Is Hesitant
Institutional investors are pulling back from the housing market. In the third quarter of 2024, large investors owning more than 1,000 properties accounted for just 0.3% of home purchases—the lowest level in seven years (excluding the pandemic-induced freeze in 2020).

The main issue is affordability:
The average American home is priced at a 4% cap rate, too low for big investors who need at least a 5%-6% cap rate to generate acceptable returns.
Even with slightly cheaper borrowing costs than the average consumer, institutional investors are finding it hard to make deals work.

Overpriced but a Good Hedge?
Despite these challenges, the current environment has offered some advantages for landlords:

- The lock-in effect of ultra-low mortgage rates has kept valuations high, even as home purchases slow.
- Sky-high prices are allowing landlords to prune their portfolios, selling properties at near-record valuations.

Alternatives for Institutional Buyers
With existing home prices too high, some big players are pivoting:

- American Homes 4 Rent is focusing on building new homes or buying directly from developers.
- Investors are targeting fixer-uppers, which are cheaper to buy and renovate. According to Amherst, roughly $12 billion worth of homes are available at a 5.75% cap rate, though they often require significant upgrades.

A Housing Correction Ahead?
Wall Street estimates that U.S. home prices would need to drop by 10%-15% for institutional investors to return to the market in force. This could serve as an indicator of how much current buyers may be overpaying in today’s overheated market.