Hedge Funds are Fueling Foreclosure Inflation in Hot Markets


Though hedge fund purchases on a national level have had minimal impact, in the nation’s hottest foreclosure markets hedge funds, or institutional investors, are contributing to double digit foreclosure price increases and dramatic declines in REO inventories.

A new analysis 16 of the leading foreclosure markets by CoreLogic economist Sam Khater suggests that institutional investors are driving up prices in six hot foreclosure markets where institutional investors’ purchases increased last year.

“The media has focused attention on institutional investors using cash to invest in single-family residential properties to rent, but relative to the overall market, the scale of their purchases is still very small,” Khater said.  He noted that Blackstone, reportedly the largest hedge fund investor, has committed to buy 125,000 properties in 2013.  By contrast, small investors purchased sone 600,000 homes using first-lien financing last year.

However, hedge funds are increasing their investments and in a few selected markets their impact was very large last year.

Phoenix saw prices rise 37 percent over 2011, Las Vegas rose 30 percent and in the balance of the six markets foreclosure prices increased by double digit amounts.

“More importantly, the ripple effects are greatly impacting the broader market,” Khater wrote.  “Lower end home prices in markets with rising shares of institutional investors are up 15 percent from a year ago, compared to only 6 percent for the remaining markets.”

Khater said the large volume declines of foreclosures in Las Vegas, Atlanta and Phoenix are to do hedge fund activity, where declines in California markers are primarily to do individual investors.

Khater said institutional investors are clearly concentrated in five states: Florida, Georgia, Arizona, Nevada and North Carolina.  In Miami last year, hedge funds accounted for 30 percent of REO sales; 23 percent in Phoenix; 21 percent in Charlotte; 19 percent in Las Vegas; and 18 percent in Orlando.

Hedge funds were much less active in California and the Midwest.  In the Midwest, REOs remained elevated compared to Florida and Southwestern markets.

“Minneapolis and Chicago are drawing less interest from both types of investors generally, relative to these other markets.  Only Detroit is garnering interest from institutional investors,” Khater said.
Photo: gtall1

About Author

Steve Cook is the editor of Real Estate Economy Watch and writes for a several leading outlets in addition to BiggerPockets, including Equifax and Total Mortgage. He also provides communications consulting services to leading real estate companies. Previously he was vice president of public affairs for the National Association of Realtors.


    • Tracy;

      Great to hear from you.

      If the locusts have indeed left Phoenix they virtually picked it clean. Overall inventory is down 13% on Realtor.com in February year over year. There is less than a month’s supply of properties for sale under $200K accordiong to Home Value Forecast. ForeclosureRadar reports REO inventories in February were down over 25% from a year earlier and fell 4% from January. At the end of the year, REO discounts were about 10%.


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