How Big Institutional Money Distorts Housing Prices

Tyler Durden's picture

Submitted by Chris Martenson of Peak Prosperity blog,

The airwaves are full of stories of economic recovery. One trumpeted recently has been the rapid recovery in housing, at least as measured in prices.

The problem is, a good portion of the rebound in house prices in many markets has less to do with renewed optimism, new jobs, and rising wages, and more to do with big money investors fueled by the ultra-cheap money policies of the Fed.

On my recent trip to Salt Lake City, Utah, after presenting to a bi-partisan audience in the Capitol building, a gentleman came up to me and introduced himself as a real estate agent.  He explained that he'd been seeing something very strange over the past six months, where very well capitalized, out-of-state private equity funds had been buying up huge swaths of residential real estate with cash. He wanted to know if I knew anything about this.

Of course I had been tracking this phenomenon for a while. But I had not been aware that Salt Lake City had been one of the targets, so I asked him how the deals worked there.  Apparently, the hedge funds make "full ask" price offers, sight unseen and without conditions (such as inspections and the like), for whole baskets of available properties, typically in the middle to lower price ranges.

The effect, not surprisingly, is that regular home buyers are being outbid and eventually priced out of the market.  Over time, these full cash offers at the ask get noticed and home sellers begin to raise their asking prices. For a young family saving to obtain the required 20% down, a 10% hike in price on a median house translates into an additional $3k - $4k that they must have to set aside to make the deal work (assuming they've not just been priced out of the house they wanted to buy).

The impact, he told me, is that a growing number of young families are finding themselves unable to obtain their first home. 

They can thank Ben Bernanke for this.  Here's why.

The Back Story

The housing propaganda machine has been turned on in full force, as exemplified by this article in the Wall Street Journal that headlined the front page:

Home Sales Power Optimism

May 28, 2013


Home prices surged during the first quarter at their fastest pace in nearly seven years, the latest sign of a sustained warm-up in an economic recovery that has otherwise been marked by starts and stops.


The housing-market revival—and an accompanying report on consumer confidence—adds new grist for a debate inside the Federal Reserve about how far to push its easy-money policies, including an $85 billion-a-month bond-buying program which has helped to keep mortgage rates near historic lows, boosted asset prices and begun to stimulate hiring and spending.


Over the past year, the share of foreclosed property sales has fallen, particularly in California cities, Las Vegas, and Phoenix, which have posted the largest year-on-year price growth


The latest reports were big factors driving financial markets Tuesday. Stock investors, encouraged by the strong data, sent the Dow Jones Industrial Average to a new high

There you have it.  The rising house prices are being presented as  a signal of a "sustained economic recovery" that feeds into consumer confidence and as reason to propel the stock market to new all-time highs.  What's not to like in that narrative?

However, if you value context, the above article will leave you disappointed because it omits the main driver of house price gains in the areas mentioned: big, institutional money seeking rental income and future capital gains.

As the article noted:

Many of the largest home-price gains have come in the West, including many markets hit hardest by the foreclosure crisis.


In March, prices were up by 22.5% in Phoenix from one year earlier, and by 22.2% in San Francisco. Other cities with double-digit gains included Las Vegas (20.6%); Atlanta (19.1%); Detroit (18.5%); Los Angeles (16.6%); Portland, Ore. (12.8%); Minneapolis (12.5%); San Diego (12.1%); Tampa, Fla. (11.8%); Miami (10.7%); and Seattle (10.6%).

The fact that big funds with big money have been very aggressive cash buyers in the formerly hardest-hit markets is very well documented and has been for well over a year.  How such important context gets left entirely out of an article about house-price appreciation in exactly those same markets is something of a mystery, at least from the standpoint of honest journalism.

Here's just one article out of many that have observed and reported on this issue:

Wall Street Institutions Behind Home Price Surges in Markets Like Phoenix

Mar 18, 2013


The March MarketPulse report from CoreLogic examines the rise of institutional investors and the effects they are having on distressed inventory. The analysis, compiled by CoreLogic deputy chief economist Sam Khater, looked at 16 major U.S. housing markets where bank-owned inventory (REOs) have been relatively high since the housing bubble burst.


He assessed whether local activity was comprised of mom-and-pop individual investors or institutional investors, defined as either entities that have purchased five-plus properties a year under the same name or under an incorporated name.


Here’s what Khater found: institutional investors have been targeting specific markets and then accelerating purchases of REOs in those markets, driving down distressed inventories and leading to notable increases in REO prices that have in turn led to larger market upticks.


Institutional investors have focused buying efforts strongly on south and southwestern cities that were hit hardest by the foreclosure crisis. The cities where investors activity has been particularly robust in the past year are Atlanta, Ga., Detroit, Mich., Las Vegas, Nev., Phoenix, Ariz., and Calif.’s Los Angeles, Riverside and Sacramento.


“In Q4 2012, Phoenix REO prices were 37% higher than a year ago, followed by Las Vegas (30%) and several California markets. All six markets with rising shares of institutional investors experienced double-digit increases and were among the top nine for REO price appreciation.


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


Institutions are most active in five states: Florida, Georgia, Arizona, Nevada and California. Interestingly the metro area that welcomed the most institutional activity in 2012 was Miami, Fla., with firms funding 30% of all sales. Single-family home prices for the Miami metro area rose about 11% in 2012 (including distressed homes), according to CoreLogic.


Institutional investors accounted for 21% of all sales in Charlotte, N.C., 19% in Las Vegas, and 18% in Orlando.

With up to 30% of all home sales in some markets going to funds that have been notable for buying with cash at the asking price, it is not hard to conclude that the big funds are driving up prices.

A simple comparison of the Case-Schiller Index, which the media trumpeted as revealing that housing has recovered with the list of areas where the big money funds have been most active, shows (noted by green circles over the blue bars) the following:

That is, the places where the biggest price increases have been noted are the same places that giant institutional funds are buying up tens of thousands of properties at the ask.

Where the first 'rebound' seen after a market correction is the prices of the asset merely stabilizing (because the yr/yr comparisons eventually head to zero), the most recent gains are definitely at levels that have been associated with bubbles and eventual corrections.


Here are a few more articles for context, each of which demonstrates the obvious impact of institutional money on various key housing markets:

Hedge funds crowd first-time buyers out of housing market

Dec 10, 2012


There are still a whole lot of foreclosed houses out there. You would think that means it's a great time for first-time buyers to purchase a house. But that's not the case: One reason, private equity firms are buying up huge numbers of single-family houses. Wall Street wants to turn them into rentals.


Jonathan Shidler is a realtor in California. Lately he gets at least one call every day from a hedge fund manager who wants to buy single-family houses in bulk.


He says they are buying them like a financial instrument, "which is fine and dandy. But what's different about these instruments is people live in them. You put your key in it and go inside. You get naked inside of it. So it makes it a little more personal."


Wall Street has been investing in residential housing for decades. What is new is the scale of these purchases. Hedge funds are buying thousands of single-family houses around the country, especially in states hardest hit by the housing crash, like California.


"This is a 1,200 square foot house with detached two-car garage, O'Rafferty said as he put a key into a ranch style home on a corner lot. The house he showed is what he calls "The gold standard of entry-level homes."


This is the type of home that hedge funds are snapping up. O'Rafferty put this house on the market on a Friday. By Monday he had 17 offers.


Those offers came from two types of buyers: Investors looking to turn a profit and families looking to get a piece of the American dream. These days O'Rafferty almost always sells to the investor.

Blackstone Buys Atlanta Homes in Largest Rental Trade

Apr 25, 2013


Blackstone Group LP (BX) bought 1,400 properties in Atlanta, some eligible for federal low-income housing subsidies, in the biggest bulk purchase for the fledgling homes-for-lease industry.


The private-equity firm, which has spent more than $4 billion on 24,000 rental properties in the last year making it the largest buyer in the U.S., purchased the residences from Building and Land Technology, said Marcus Ridgway, chief operating officer of Invitation Homes, Blackstone’s single- family rental division.

In the past twelve months, Blackstone has raised over $8 billion to buy up medium- and low-priced housing, while JP Morgan has initiated a fund to buy up to 5,000 homes.  Morgan Stanley has raised a billion dollars to buy up to 10,000 homes. 

If it strikes you as odd that the big banks would be bailed out by the taxpayers and then turn around and use that same money to buy homes to then rent back to those same taxpayers, then we hold the same view.

This trend has been running for so long, and it is so obvious, that it really raises a very important question as to exactly how such context can be left out of any article on the recent rebound in house prices.

As we saw with bonds being driven to generational lows, the Fed's distorting buying habits shaped the prices for the entire bond market, ranging from Treasurys to corporate junk.  Nobody in their right mind would ever consider the prices of bonds to be telling us anything useful about risk, reward, the future, or even current conditions without noting that their current prices are heavily manipulated to the upside.

Similarly, the stock market is clearly being driven upwards on a sea of Fed-supplied liquidity, and everybody knows that once if that Fed money dried up today, the stock market would fall like a stone.

Housing is no different.  As big as the market is, prices are driven at the margins, and the buying pressure of institutional money snapping up thousands and thousands of properties in a single market in a single month means that this money, too, is having a distorting effect and is driving prices upwards.

Unfortunately, it seems like the lessons of 2008 went entirely unlearned. 

Conclusion (to Part I)

It seems entirely wrong that the Fed bailed out big banks and made money excessively cheap for institutions, and that this is being used to price ordinary people out of the housing market.  Said another way, the Fed prints fake money out of thin air, and some companies use that same money to buy real things like houses and then rent them out to real people trying to live real lives.

At the same time, we are also beginning to see the very same hedge funds that have re-inflated these prices slink out of the market now that the party is kicking into higher gear – all while new buyers are increasingly having to abandon prudence to buy into markets where the fundamentals simply aren't there to merit it.

Didn't we just learn a few short years ago how this all ends?

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Hulk's picture

"Didn't we just learn a few short years ago how this all ends?"

Financial memory is 2 years. Invest accordingly !!!

WayBehind's picture

In March 2012 I submitted at least 30 offers before I was able to buy a rental condo unit in SoCal. I was competing against all cash offers above asking price. At the end I was "lucky" just because of my very skilled realtor friend. It was worth it as the unit is rented and generating some beer drinking pennies :)

Divine Wind's picture




Damn these people piss me off.

Intended or unintended, the consequences of their fiddling with markets really screws with a lot of people.


John Law Lives's picture

"...private equity firms are buying up huge numbers of single-family houses. Wall Street wants to turn them into rentals."

Gee, I wonder how it will turn out when a flood of quick-buck artists try to play slumlord...


max2205's picture

If ben can double the spy then he can at leastt get a triple on housing.....oh wait.....

otto skorzeny's picture

And here I thought it was all of the high paying jobs being added in the US that was  driving home prices up.

nbsharma's picture

these buyers have really distored the comps in the marketplace. sellers are using these new comps as the "bottom floor" for pricing, which has caused enormous inflation in the prices of home even in areas where unemployment (and foreclosures) are still very high. disappointing to me as a first-time home buyer in the market.

otto skorzeny's picture

The govt is putting a false bottom in so the local taxing bodies aren't crushed by cratering home values-also the reason they're making the banks keep foreclosures off of the market. They're building homes in SW Chi burbs like crazy(IL=job loss central) while you can drive by neighborhoods that are 1/2 full of homes that are in foreclosure and the people are still living in them.


Unknown Poster's picture

I hope the houses that they are buying in Detroit haven't been bulldozed.

essence's picture

It makes perfect sense what the Fed is doing if the owners of the fed are in fact the owners of the TBTFs.

I have to give credit to a ZH poster with his comment the other day. Basically it stated that you're either naive or a moron if you believe the Fed chairman (currently Ben Bernanke) is anything more than a tool carrying out the wishes of the owners of the Fed.

Ponder it for a bit. Do you really thing that the owners of the PRIVATE FED corporation (unknown to the level of individuals) would entrust the direction of the most powerful corporation on the planet to an academic from Princeton with no real world business experience?



samsara's picture

And there you go.

Now extend that with the fact that the 'owners' offspring (thousands of them) all attend the same colleges that their parents went to. Say Harvard for example, The go to work out of college into a company who is run by other graduates of those same schools, And you start to see the progression that can be observed over generations.

In other words "What do the Offspring of the owners of the Fed expect to do after after graduating."

They, in mass (tens of thousands) will work for other corps. After a few years they are collectively sit on all the major boards of corps.) Attend meetings once a year, have a couple burgers, ( many had Benny himself speaking at their graduation). and on it goes like father and son businesses. Just at a broader and higher level)

ITrustMyGut's picture

great explanation... and the most simple refute to a sheep that screams tin foil hat. if you were born into a powerful family, went to the same schools, frats, social circles.. its simple human nature that decisions would be made to ensure the power, and enhance it. simple.. natural evolution for generations.

samsara's picture

You can look at two popular films to see it. 

Animal House for one generation(1960's)  Greg marmalard and his ilk from that generation.

Delta house (animals)  representing that "Generation's"   Working Class.

In the movie PCU David Spade (Balls and Shaft ie Skull & Bones)  and his ilk were the 90's "Generation's"  up and coming.   Of course Jeremy Piven (the Pit)  represented the working class of that generation.

That is why it is a ploy to divide the "Generations"  like the boomers and Gen X / Y Generations.

It's NOT the Boomers fault,  Nor the Gen. X / Y 's Fault.    EACH generation has their Omega/Ball&Shafts   "Future Ordained Leaders in training"  and each generation has their Pit and Delta House (ie future working stiffs).

It's a divide and conquer to have us fighting amongst for lack of better words "Pitting"   the Delta House generation against the Pit generation.

Where it is really should be the Delta House AND the Pit  vs the Omega House and the Shaft & Balls members of each Generation.



Seasmoke's picture

A Nation of Renters is what they want.

Schlomo Bergstein's picture

A nation of renters is a nation of slaves. A nation of landless peasants unable to afford to own any land even in the worst locales. This is all thanks to the Fed and government intervention of course, making housing prices beyond the grasp of us peasants and indebting us and future generations to do it. It makes me sick just thinking about it. 

PiltdownMan's picture

Of course itbiscan investor spike.

buzzsaw99's picture

the fed will own those houses eventually

GrinandBearit's picture

George Carlin has said:  "They'll get it all eventually".

George was so right about many, many things.

pragmatic hobo's picture

ben bernanke is either an idiot or one evil person or the big banks have pictures of him fucking little boys.

Tenshin Headache's picture

Yowza. Two great housing pieces on the same day.

"If it strikes you as odd that the big banks would be bailed out by the taxpayers and then turn around and use that same money to buy homes to then rent back to those same taxpayers, then we hold the same view."

Odd indeed.

ITrustMyGut's picture

this all supports...  Endgame is Monopolization. Period. forget silly cries of socialism, communism, blah blah..

this is all just a stop along the road to W Va coal miners; work in co. mines, evil, slave like conditions, live in co housing, shop in co store. The owners retain $.99 of every fiat pd for labor. Full on Slavery.


this is NOT a case of stupidity, or anything else. this is purposeful, targeted, more plain every day.

kita27's picture

i couldnt agree more. I have a pile of cash and i am ready to jump into property development here in Perth, but the price of land and housing are astronomical. Everything in my street is bought up within a week of being advertised. Nothing over 700sq meters can be bought in Perth under half a million. 

im itching to jump in the market but my senses say NO!  This is based on printed money, not the economy. To buy into this market will be sure bankruptcy when interest rates rise.

But will they ever rise?  What is the end game?   will the middle class eventually be priced out of the whole economy and revolt? 

i wish to god this experiment will end.    We neeed 8% interest rates and housing at $350,000.  Not 2% rates and housing at $600,000.

monximus's picture

4% interest rates and housing at $350,000 is $200,000 greater than median household income can afford.

Downtoolong's picture

Same game in every market everywhere all the time.



- Manipulate prices by manipulating the money supply and credit.

- Buy low from the desperate sellers and sell high to euphoric buyers at the bottom and top of the market cycle you created and control.

- Buy lots of champagne and caviar with your profits while watching the Muppet losers from your penthouse window.

What a scam, what a perfect scam it is.


moneybots's picture

"Didn't we just learn a few short years ago how this all ends?"


People have short memories, once a new bubble gets started. 

MarcusAurelius's picture

Well here is the underlying problem that started many years ago, courtesy of central bank intervention. Now that bubbles have been blown for about thrity years. The only way to create demand is to blow more bubbles. Natural demand was distorted many decades ago. Much like the present Fed policy of printing money. The largest problem is realistically making the rich richer because the money does not filter into the areas that it is needed most.

     Here, here whenever you have a problem in the markets just print it away. If it were that easy we'd all be billionaires except there is one small problem. A cup of coffee might just cost you 500 million.

       This is the Milton Friedman approach to contractions in the private sector. Bernanke is simply following this premise. Replace this short fall with government interevention. Except there is one problem. "In theory it seems to work, except we don't have any proof that actaully does".