Investors of all sizes played a singular role in the national nightmare known as the Housing Depression. They soaked up toxic inventories of damaged and discounted distressed properties, repaired them and converted them into rentals to house families that had lost their homes or to replenish depleted inventories for entry level buyers. When the history of the past six years is written, we may realize that the recovery that housing is now enjoying would not be taking place as soon as it is without investors.
Now rumors have been flying for months that the largest investors have turned this equation upside down and instead of relieving pressures on housing markets, they may be making conditions worse.
At a time when there is an extraordinary shortage of listings and prices are soaring in many of the markets where Institutional investors—hedge funds and REITS—are active, then buying and warehousing and bidding up prices in the markets they have selected. (See Tracking the Hedge Fund Big Dogs: Prices and Plots).
Now there are reports that hedge funds are buying quantities of full-price homes right off the MLS at inflationary prices that are reducing tight inventories even further and igniting markets that are already hot. If true, the result could be highly volatile markets as values soar above levels that local income levels can sustain
They are rumors no longer. One of Florida’s best known housing economists, Jack McCabe, has spent months getting to the bottom of the hedge find phenomenon as if affects Florida and the rest of the nation. In this exclusive interview for BiggerPockets.com, McCabe shared his findings.
Over the past year, he examined thousands of closed, recorded cash sales to business organization named buyers (i.e. LLC, LP, Inc.) in South Florida, Tampa, Phoenix, Las Vegas, San Francisco and Orange County, CA. McCabe selected the markets because he wanted to see whether the unusual price increases in markers where hedge funds were active they were experiencing at the time were influenced by the hedge fund purchases. Cash sales and use of a business organization’s name were the two key identifiers for institutional investors.
Two factors seemed to drive their purchasing strategies, he said. The first was the need to manage the properties effectively after they were purchased. They concentrate on a discrete area that will be easier to manage. The second is the time constraints on their access to capital. “They have only two to three years to make investments before investors take back their funds. They have to deploy the capital quickly. They know that they have a fairly short window,” he said.
- Large business organizations were responsible for as majority of all residential transactions in 2013 in these markets. Transactions included bank sales to investors, auctions, and sales from MLSs, short sales and REOs.
- These large buyers made thousands of sales to funds at 25 percent or more above current market values. In some cases, comps in residential markets were lower by double digits than prices paid by corporate buyers.
- While the hedge funds initially bought lower-priced homes at bargain prices directly from banks or foreclosure auction websites, a paradigm shift has occurred since last year. Funds and high-net-worth investors are now buying MLS listings in these markets. “Something happened for no particular reason” and the funds began to buy everything, as if they could make more by controlling the entire market, McCabe told me.
McCabe said they began to notice MLS purchases earlier this year. It takes a while for the transactions to be recorded but he characterizes hedge fund MLS purchases a growing trend. “In the last several months “40 to 79 percent of the more recent closings in these markets are sales to corporate entities,” he said.
Even though funds may be purchasing properties at huge premium over market price, or over comparable properties in the market, McCabe said the funds still see their purchase as a discount since they are paying a price below the peak price. “I think they all believe that they are going to get prices back to peak sometime between now and 2017,” he said.
“The small investors are being elbowed and I get emails from small investors all the time who say, gee I’m glad somebody gets it. Now it’s the potential homeowners who are getting elbowed out,” McCabe said.
Photo: rocket shipTracking the Hedge Fund Big Dogs: Buying from the MLS by Steve Cook