Tracking the Hedge Fund Big Dogs: Prices and Plots


Last week was not a good week for the new REO to Rental REITS that are fast replacing hedge funds as the most popular way to buy and manage vast numbers of former foreclosures.

American Homes-4-Rent reported it had lost $14 million on revenues of $18.1 million, most of which came from acquisition of another fund.  This loss comes on the heels of its IPO, which raised 44 percent less than the $1.25 billion the company hoped for.

So then American Public Media’s Marketplace called me for an interview to answer the question, “Why are half of homes sold for cash?” which led to a discussion of the value of single family rentals and buyers who pay cash and hedge funds were at the top of the list, though small investors buy many more houses.

From what I had seen lately, hedge funds and REITs have been doing a number or wise things.  Last May Carrington Holdings announced it was going to take a break from buying, probably good news for their investors who don’t want to see returns on investment shrink in appreciating markets.  Funds and REITs seem to be finding new, untapped markets where prices are lower and distressed properties more abundant.

Yet there is one charge that seems to stick: that the big dogs are bidding up home prices as part of a larger pan to drive away competition and drive up the value of properties they own. (See Are Hedge Funds Blowing Bubbles?

Last June the New York Times accused Blackstone and other investors of contributing to price increases that are not sustainable and driving first-time buyers from the market.  I thought Blackstone’s reply was effective:

First, Blackstone is not buying houses in sufficient numbers to make an overall difference in house prices. Blackstone, through its subsidiary Invitation Homes has bought 29,000 homes, representing three hundredths of one percent of all US housing (out of 115 million total units)…

Second, prices of homes are rising simply because the country has not built enough homes… Third, home prices remain well below long term trends despite their recent increase. New home prices nationally are 37% higher than existing home prices, as opposed to the long term average of 13%. Home prices are still 22% below the long-term price trend from 1951-1999…

Fourth, Invitation Homes’ purchases have little to do with first-time home buyers or existing home owners. Invitation Homes (a Blackstone subsidiary) only buys post-foreclosure homes, after all attempts at loan modification and other measures have failed. Fifth, foreclosed homes are usually abandoned and a blight on the neighborhood, contributing to a downward spiral of home prices. Cleaning and fixing up these houses and putting in stable long term renters improves neighborhoods and the value of everyone’s home.

Sixth, increasing the supply of rental housing is a good thing.  Before Blackstone started buying homes, there were already 13 million single family homes for rent in the US…

For another perspective, I called Jack McCabe, a leading economist in South Florida who I relish for his knowledge of the Florida marketplace and his take-no-prisoners candor.  Jack calls a spade a spade, which is why he’s quoted coast to coast and writes a regular column for the Sarasota paper as recently:

Prices being paid for some of these distressed homes, in my opinion, are far above realistic current market values. Coupled with a declining Realtor inventory of homes to sell, the fever for acquiring single-family homes for future rental is accelerating, and median home values are again being artificially bolstered by these temporary, abnormal market conditions.

Floridians needing mortgage financing are being shut out of the market as cash remains king to sellers. And these funds, instead of buying at a deeply distressed price structure, are in many cases now overpaying, thereby raising the median home price.

Is this the start of Florida’s next real estate bubble? Are we going to see market manipulation of real estate prices by corporations?

The answer was yes, when we connected by phone.  Jack has looked at not just data in Tampa, Sarasota and other Florida markets where hedge funds have been highly active but at markets in California, Nevada and Arizona as well as Tampa, Miami, Bradenton, and West Palm Beach.

First, McCabe points out that the level of double digit appreciation realized in markets where hedge funds are known to be active compared to Case-Shiller can only be explained by purchases far above Case-Shiller levels.  In fact, prices have reached levels 25 percent above comparable levels for properties lists on local MLSs.

“I attribute it to attempts to manipulate prices upward to raise the value of the properties that we own.  We are used to seeing annual appreciation of 4%, 5% and 6%.  They are realizing appreciation of 28% or more.

“Consider how that affects home buyers.  In Florida, prices are being artificially inflated when the average income has increased only 12% since 2007, and it’s also harder to get a mortgage than it was then,” said McCabe.

For the heck of it, I looked at the data in Tampa versus Orland, two very different cities but close and subject to the same state laws that have made Florida a foreclosure nightmare in the past.  List prices are up 16.43% in Orlando and 17.99% in the Tampa market, which could prove a lot of things.  Hedge purchases are so few that they are having a minimal impact on the traditional MLS market, but might have more of an effect on lower tiered properties.  It could be that hedge funds in the two cities, though they are different companies, are following a common strategy as part of some grand scheme to control the marketplace.

Most likely, some hedge funds, flush with cash, over paid initially but now, as prices in the vast majority of markets are rising, prudence dictates that they spend their money carefully if they are to achieve a return on investment close to that numbers they presented to their investors.


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.


  1. Suprise suprise suprise. Im a relative novice investor. Common sense told me these hedge funds were inflating the market because they can afford to take the hit when stuff hits the fan. Corporations again win, every day citizen lose.

  2. Excellent article! I have experienced this in my market in Houston to a much lesser extent. Our dip wasn’t nearly as low and as such our recovery not nearly as explosive. Hedge funds were as a group a bit late to the party in Houston. I worked with a couple of the larger ones and they had an insatiable appetite for about 6mo before their operations disbanded after realizing they had to repair and RENT these properties once purchased.

  3. This was very clear to me the minute I got into the investment business. I live in So Cal and tried buying flip properties over ere for about 5 months, after no success I analyzed the deals I had previously made offers on. I found that my offers were typically 30-80,000 less than what the property ended up selling for. Pure insanity! I had to refocus my business or I would fail right out of the gate…4 months later in my new market I have completed a flip and a few wholesale deals now that I am in a normal stable market that is appreciating about 3% on average.

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