2012 was the first year in which hedge funds invested significantly enough in residential real estate to change major markets. There’s been much debate over to the extent and nature of their investing. Many hedge funds are purchasing foreclosures/pre-REO bank owned properties in order to rent them out until the market improves and they can be sold at a profit, but what this means for the market to be seen.
Some have accused hedge funds of driving small investors and home buyers out of foreclosure markets, creating overheated markets that become bubbles and lock buyers out of their traditional neighborhoods. Others credit the funds for soaking up toxic foreclosures before they even hit local markets as REOs, preventing price declines that would further hinder the housing recovery. Purchasing these properties before they fall to REO asset management companies has the added benefit of creating new, quality housing options for families who choose to rent rather than buy.
Though last year 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: Las Vegas, Oakland, Phoenix, Miami, Sacramento, and Atlanta. In search of better prices and greater supplies, funds are now reportedly branching out to markets like Tampa, Riverside, Detroit, Orlando, and Sarasota.
Tracking Hedge Funds
When the discounts for which foreclosures sell suddenly shrink and foreclosure/pre-REO bank owned property prices suddenly soar, it’s usually a sign that hedge funds have come to town and set up shop. Hedge funds generally avoid buying REOs because they can purchase pre-foreclosures at lower prices and larger lots. Sales of pre-foreclosures and bulk sales are virtually impossible to track, but REO sales are listed on multiple listing services and registered as REOs in public records.
Large purchases of defaulted properties that are still in the foreclosure process (not yet REOs) also impact the REO market. Pre-REO purchases reduce the number of foreclosures that become REOs, creating greater competition among small investors and home buyers for the remaining inventories, driving up prices on REO bank owned properties and shrinking the foreclosure discount.
Stewart Valuation Intelligence recently ran a complete series that follows this trend throughout the Atlanta CBSA. Find the complete series here.