Last year was the first in which major institutional investors (hedge funds) operated on a large enough to change major real estate markets. While there’s been much debate, conjecture and anecdotal reporting as to the size and nature of their activities, for the first time a leading real estate economist has tracked their impact during the year, including their migration from traditional to newer foreclosure markets.
The March issue of “The Market Pulse,” CoreLogic’s monthly newsletter, contains a remarkable analysis by CoreLogic Deputy Chief Economist Sam Khater, who found the impact of hedge funds’ purchasing activities to be significant and in many ways surprising. Certainly the big dogs in town have changed forever residential real estate investing in the markets where they have been a major presence.
To measure the size of hedge fund purchases, Khater focuses on the dramatic decline in REO inventories, a significant sign of investor activity, and looks at the impact in the top five markets where they have declined the most: Las Vegas, Oakland, Phoenix, Riverside and Sacramento. Beginning in January 2012, REOs collapsed and the price volatility disappeared, suggesting a very large shift in these markets that overwhelmed normal volatility.
Though the scale of institutional purchases compared to the size of foreclosure markets was small, their impact was magnified because they were concentrated in a few selected markets. To measure the actual size of hedge fund purchases, Khater came up with clever way to weed out purchases by individual investors from the total investor market share. He defined any investor using first-lien financing as an individual investor and subtracted them from the total. Among the rest, he defined any investor making five or more purchases a year under the same name or incorporated entities making purchases as institutional investors.
This allowed him to look at markets with rapidly rising institutional investor activity in a systematic way. The top candidates include Atlanta, Detroit, Las Vegas, Phoenix, Los Angeles, Riverside and Sacramento. Hedge fund activity increased by 50 percent in these markets last year.
Markets with flat or lower recent increase in hedge fund activity are Charlotte, Chicago, Minneapolis, Oakland, San Diego, Miami, Orlando, Tampa and Warren, MI. In these markets, institutional investors increased their market share by 15 percent or less last year.
Three markets stood above all the rest because they experienced a significant increase in hedge fund activity during the year and had a high market share of institutional investors. These are Atlanta, Las Vegas and Phoenix—also the markets with the largest percentage declines in REOs last year.
Related: Hedge Funds Go the REIT Way
Institutional investors are now concentrated in five states: Florida, Georgia, Arizona, Nevada and North Carolina. Their impact in leading markets is dramatic. In Miami they accounted for 30 percent of all property sales in 2012, the highest of any market in the study. Next were Phoenix (23 percent of all sales),
Charlotte (21 percent of all sales), Las Vegas (19 percent of all sales) and Orlando (18 percent of all sales).
Hedge fund purchases have had significant impacts on the local real estate markets where they have been active. Home prices in all six top hedge funds markets experienced double digit median home price increases last year. They have driven up REO prices for individual investors and owner-occupant buyers. Ripple effects from the drought of REOs in those markets have driven lower-tier home prices up increased 15 percent over a year ago, compared to only 6 percent in other markets with a lesser hedge fund presence.