After the housing market collapsed more than a decade ago, new investors poured in to buy foreclosed homes and rent them out. Now, a $4.3 billion deal suggests that the bargain-hunting binge in housing is finally over.
Two of the biggest institutional single-family landlords in the United States said Thursday that they planned to merge, an indication that the housing market has recovered much of the ground it lost in the financial crisis. And as home prices rise in many areas, affordable housing, for deep-pocketed investors and young first-time buyers alike, is becoming harder to find.
The two institutional landlords, Invitation Homes, a rental business spun out of the private equity giant the Blackstone Group, and Starwood Waypoint Homes said they would combine to create an entity with about 82,000 homes in more than a dozen big markets.
The deal could set the stage for other institutional investors to join forces. With fewer opportunities to buy homes at a discount, the keys to growth will be reducing operating costs, gaining market share and potentially increasing rent.
With consolidation, Wall Street-backed firms’ once-bold strategy of cleaning up the mess created by the crisis by going to foreclosure auctions and snapping up hundreds of cheap homes has ended.
Wall Street jumped into foreclosed homes reckoning that there would be a fundamental shift in housing, with millions of people losing their houses and becoming renters — at least until they could repair their credit scores.
On the eve of the crisis, the rate of homeownership — the percentage of households that own a home — hovered around 69 percent. Today, it is 63.7 percent, according to the United States Census Bureau. And last year, the number of new renters again outpaced the number of new homeowners, according to Harvard University’s Joint Center for Housing Studies.
But the economics of buying recently foreclosed homes to rent out has become more challenging for Wall Street firms that seek to generate double-digit returns for investors, and for publicly traded real estate investment trusts that promise shareholders hefty quarterly dividends.
For the past year or so, many institutional investors have had to compete with potential homeowners shopping for foreclosed homes posted for sale on multiple listing services.
“As home prices rise, most of the institutional investors are dramatically slowing the rate at which they buy new homes,” said Laurie Goodman, director of the Urban Institute’s Housing Finance Policy Center. “And with the easy money days behind them, they need a more efficient cost structure.” She said the merger was a way accomplish that by gaining further economies of scale.
Blackstone was one of the first private equity firms to begin buying foreclosed homes in the wake of the financial crisis, fixing them up and renting them out. The firm, which began buying homes in earnest in 2011, is estimated to have spent $10 billion on its foreclosed-home-to-rental bet.
Invitation Homes, which emerged from that push with almost 50,000 homes, is a company that Blackstone built from scratch.
Purchases by Invitation Homes have dropped sharply since 2013, when it was buying hundreds of homes each week. Its acquisitions are down more than 90 percent from then, and the period of “hyper growth” for the industry has passed, said a person close to the company who was not authorized to speak publicly.
In all, institutional investors have bought an estimated 200,000 single-family homes to operate as rentals.
But that is a fraction of the overall number of rental homes in the United States. According to housing industry estimates, there are as many as 17 million single-family rentals across the country, most owned by mom-and-pop landlords or firms operating fewer than 100 such homes.
Before the crisis, there were about 10 million rental homes, an indication of how many homeowners were displaced by the worst housing crisis since the Great Depression.
Consolidation among institutional investors began three years ago with American Homes 4 Rent, which owns 49,000 rental homes, buying Beazer Pre-Owned Rental Homes. A few months later, Starwood Waypoint bought Colony American Homes in an all-stock deal that valued Colony American at $1.5 billion. Most of the mergers since then have been small, and the deal between Invitation Homes and Starwood Waypoint would be the biggest in an industry that did not exist a decade ago.
The move by institutional investors into the housing market has been credited by some with helping to stabilize the sharp and steady decline in home prices early in the financial crisis. The presence of private equity firms and hedge funds in the market also helped attract the interest of smaller investors.
But big firms like Invitation Homes and American Homes have drawn criticism from housing advocates for renting their homes at prices that are unaffordable for the working poor.
Few renters with federal rent subsidies known as Section 8 live in homes owned by Invitation Homes and other institutional investors. That is partly because such investors have tended to operate in largely suburban communities and have avoided buying homes in urban areas.
In the past, Blackstone has said that 72 percent of houses owned by Invitation Homes have monthly rents within federal affordability guidelines for the markets where it operates.
This year, housing advocates and some legislators criticized Fannie Mae, one of two government-controlled mortgage finance giants, for agreeing to guarantee a $1 billion financing deal for Invitation Homes without getting any assurances that the company would do more to provide affordable housing.
Kevin Stein, a lawyer and deputy director of the California Reinvestment Coalition, a group that supports the rights of tenants and homeowners, said he was concerned that the merger of Invitation Homes and Starwood Waypoint would increase their power to raise rents.
“What is the level of concentration? This is a concern to our members,” Mr. Stein said. “There are so many communities in California where people are being driven out because of housing costs, and this is part of the dynamic.”
Under the terms of the deal announced on Thursday, each Starwood Waypoint share will be converted into 1.614 Invitation Homes shares. The total enterprise value of the combined company, including debt, would be $20 billion, the companies said.
Invitation Homes’ shareholders will own roughly 59 percent of the combined company’s stock, while Starwood Waypoint’s investors will own the rest.
Blackstone, which took Invitation Homes public in January in an offering that raised $1.7 billion in net proceeds, would continue to have a stake in the combined company.
After the merger, which is subject to the approval of shareholders, is completed, John Bartling, Invitation Homes’ chief executive, will step down. Fred Tuomi, the current chief executive of Starwood Waypoint, will be the chief executive of the combined company.
The new company’s 11-member board will include six members of the Invitation Homes board, including the chairman, Bryce Blair, who will be chairman of the new company’s board. Jonathan D. Gray, head of global real estate for Blackstone and an architect of its single-family rental trade, also will be on the board.
The combined company will operate as Invitation Homes and trade under the Invitation Homes ticker symbol.
On a day when a nervous stock market declined, shares of both Invitation Homes and Starwood Waypoint surged. Invitation Homes’ shares gained 3.91 percent; Starwood Waypoint’s shares rose 5.15 percent.