For many hedge funds, asset managers and private equity firms trying to play the housing recovery, the strategy is buying individual homes. For buyout titan Blackstone Group—with a bent in real estate—the answer has been to build an entire company, which it eventually plans to take public, according to sources.
In April, 2012 – with seed capital from Blackstone, expertise from property managers Treehouse Group and Riverstone Residential Group – Invitation Homes was born and began quietly investing.
"Our bet right now is the scale of the opportunity is very big, and the pricing seems quite compelling," said Jonathan Gray, head of Blackstone's real estate group, at CNBC's Delivering Alpha conference in 2012.
A year later, the scale has become huge. So far Invitation has spent $4.5 billion, snapping up 25,000 distressed single-family homes in regions hardest hit by the financial crisis, and in those slowest to recover, the company said. Most of the homes are refurbished and then rented out by Invitation. The appeal of the rental market comes, in large part, from consumers trying in a variety of ways to avoid taking on new debt, said Invitation spokesman Eric Elder.
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Blackstone's bullishness ultimately stems from how deeply the mortgage market melted down during the crisis. Today, would-be homeowners finally able to afford to buy say they are being crowded out of the housing market by big, cash-rich home buyers like Blackstone and its rivals Colony Capital and American Homes 4 Rent.
What's more, critics say the volume of homes these firms are buying has artificially inflated prices. Across the major markets where Invitation operates, home prices have risen an average of 10.4 percent, higher than the national average of 7.8 percent.
To be sure, 25,000 homes is a small fraction of the estimated 12 million single family home market. But many of the purchases by both Invitation and other housing-hungry investors are in harder-hit areas: For instance, on April 25, Invitation Homes closed on 1,380 properties in Atlanta alone.
Those areas have seen even greater price increases between April 2012 and February 2013, the operating period during which data is available. Phoenix, Las Vegas and Atlanta saw home prices rise 17.4 percent, 15.8 percent, and 16.4 percent, respectively, in the same period, according to the S&P/Case-Shiller Home Price Index.
"We are removing distressed inventory from the market, which has been suppressing national home prices," Blackstone said in a November 2012 press release when the creation of Invitation was finally announced. "These efforts are, ultimately, stimulating economies in areas hardest hit by the housing crisis."
With low interest rates fueling cheap borrowing and increasingly lower mortgage rates, it would seem they could continue the buying spree for some time. Gray has said that the window to keep buying will last for two more years, though it's unclear how much more Blackstone will spend in that time frame.
So far Blackstone's ambition for Invitation Homes has been big. The strategy: Roll up as many single-family rental homes into the portfolio and then allow renters to search properties directly on a web portal. A "national single-family rental home platform," is what it has called it publicly. What it has not said: Invitation Homes will do an IPO.
