Just as I was going about to close the books on the seasonal trade in home builders, Lennar (LEN) revived upward momentum across home builders. LEN gained 13.8% after announcing a partnership with Centerbridge to invest in rental single-family housing. News of the “Upward America Venture” lit a fire across the sector. However, the excitement quickly fizzled the next day as LEN pulled back 6.2%, and the iShares U.S. Home Construction ETF (ITB) reversed its entire gain.
While the initial excitement quickly faded, Lennar’s news is huge for the company. Upward America Venture will be a major customer for Lennar. The venture will have enough funds to lever up to $4B in purchases of single family homes and townhomes for the rental market. Some homes may come from other builders. Upward America Ventures will focus on high growth markets and potentially offer rent-to-own options for households. The venture also has an ESG spin; per Co-Chief Executive Officer and Co-President Rick Beckwitt:
“The vehicle’s social focus provides a unique opportunity for families and individuals across the country to live in brand-new homes at an attainable price point, all without putting up a down payment. We have a distinct opportunity to create upward mobility in the housing market through this initiative.”
Upward America Venture will target rentals affordable to households earning approximately the median income in a given housing market.
These plans come at critical time for the industry as soaring building costs and now rising mortgage rates are pressuring the industry. Currently, 75.1 million American households cannot afford to buy the median priced home in their market according to the National Association of Home Builders (NAHB). Thus, building rentals becomes a logical next step to provide affordable housing options.
Invitation Homes As A Model for the Upward America Venture
The single-family home rental market is of course not new. For example, Invitation Homes (INVH) is a publicly traded company that buys and rents out single-family homes. The chart well represents the nature of the business. Rentals provide steady and predictable returns. INVH bounced back quickly from last year’s stock market collapse and has traded in a range for 9 months. Prior to the pandemic, INVH enjoyed a 1-year growth spurt.
In other words, Upward America Ventures’s contribution to Lennar’s business should get priced into the stock relatively quickly. From there, the reliable pipeline of rental business will provide a floor for LEN. In the meantime, the quick pullback looks buyable as one more swing at the seasonal trade in home builders.
Be careful out there!
Full disclosure: no positions