Large investors scooping up property in weaker areas

6/8/2013

The last time the housing market was this hot in Phoenix and Las Vegas, the buyers pushing up prices were mostly small time. Nowadays, they are big time — Wall Street big.

Large investment firms have spent billions of dollars over the last year buying homes in some of the nation’s most depressed markets. The influx has been so great and the resulting price gains so big, that ordinary buyers are feeling squeezed out. Some are wondering if prices will slump anew if the big money stops flowing.

“The growth is being propelled by institutional money,” said Suzanne Mistretta, an analyst at Fitch Ratings. “The question is how much the change in prices really reflects market demand, rather than one-off market shifts that may not be around in a couple years.”

Wall Street played a central role in the last housing boom by supplying easy — and risky — mortgage financing. Now, investment companies such as the Blackstone Group have swooped in, buying thousands of houses in the same areas where the financial crisis hit hardest.

Blackstone, which helped define a period of Wall Street hyperwealth, has bought about 26,000 homes in nine states. Colony Capital, a Los Angeles-based investment firm, is spending $250 million each month and owns 10,000 properties. With little fanfare, these and other financial companies have become significant landlords on Main Street. Most of the firms are renting out the homes, with the possibility of unloading them at a profit when prices rise far enough.

While these investors have not touched many healthy real estate markets, they are among the biggest buyers in struggling areas of the country where housing prices have been increasing the fastest. Those gains, in turn, have been at the leading edge of rising home prices nationwide.

Some see the emergence of Wall Street buyers as a market-driven answer to the nation’s housing ills. Investment companies are buying rundown homes when ordinary people can’t or won’t. Nationwide, 68 percent of the damaged homes sold in April went to investors and only 19 percent to first-time homebuyers, according to Campbell HousingPulse. That is helping to shore up prices and create confidence in the broader markets.

“When people write the story of this housing recovery, these investors will be seen to have helped put the floor under the housing market,” said David Bragg, an analyst at Green Street Advisors. “In some of the key markets, that contributed to the recovery.”

The story, though, often looks more complicated on the ground. Joe Cusumano, a real estate agent in Riverside County, California, said that in recent months 90 percent of his business had been for companies such as Invitation Homes, a Blackstone subsidiary. Home values in the county have risen by 15 percent in the last year, according to CoreLogic.

Mr. Cusumano worries what will happen when these investors start selling, as they inevitably will.

“The thing that scares me is the values going up so quickly,” Mr. Cusumano said. “That’s what happened before and that’s what’s scaring me. Is this going to happen again?”

In a sign of the potential peril ahead, some of the investment firms have recently taken the first steps to cash out.

All of this has made it hard for house hunters like Jeff Martin, who is looking to buy a fixer-upper in Riverside County. Mr. Martin, 58, has made offers on 15 houses over the last year.

Mr. Martin recently has received his latest rejection. On most of the houses, he has lost out to investors offering all cash.

Mr. Martin, a retired Navy veteran, puts much of the blame on banks that have been holding onto empty houses, lowering the supply of available homes. He said he has trouble faulting the investors because he was involved in real estate financing during the last boom. But he is worried that if mortgage rates begin to rise he will lose out on his opportunity to buy. Rising mortgage rates also could lead to a broader slowdown in the real estate recovery.

Mr. Cusumano said that the investors he works for have been trimming back their purchases in the area. His agency closed on three houses for investors in May, down from eight in February.

But the fevered pitch of the market has not died down. In late May, one of his clients closed on a house just a month after it went on the market. There were eight bidders, despite a listing that said “NEEDS TLC!!”

Mr. Cusumano’s client won the house only after agreeing to go $500 over the asking price of $194,500.

“It’s just a strange market,” Mr. Cusumano said. “We are in uncharted territory.”