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After all those foreclusures, not so many houses for sale

A 'For Rent' sign stands in front of a house in Chicago, Ill.

There are still a whole lot of foreclosed houses out there. You would think that means lots of available houses on the market for first-time buyers. But that's not the case. Many places with high foreclosure rates have housing shortages. 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 fourth-generation realtor in California. His family's business is in the city of Redlands in the Inland Empire, one of the hardest hit regions of the housing crash. He says lately he's been getting calls every day from hedge funds that want to buy houses.

“I got off the phone with a hedge manager earlier today and the first words out of his mouth are, what do you have for sale,” recalled Shidler. “No hello. No how are you. I love conversations that start like that.”

The hedge fund manager told Shidler he wanted to buy $12 million of property in the next six months. This is happening all over the country, but especially in the hardest hit states, Nevada, Arizona and California.

Bill O’Rafferty is a flipper in Riverside, another city in the Inland Empire. He buys houses at auctions and from banks and fixes them up to sell for a profit. He says there is a huge shortage of houses, “to some degree because these hedge fund folks are out here buying everything in the world.”

O’Rafferty took me through a few Riverside neighborhoods consisting mainly of ranch-style homes with well manicured lawns and an occasional palm tree. Nearly all the homes in this area are single-family houses built in the 1950s. O’Rafferty says they average about 1,400 square feet for a three-bedroom, two-bath.

O’Rafferty claims he knows the local market so well that all he has to do is look at the front yard and he can tell what a house is worth. “Every now and then I’m skunked, but not often.”

He knows this because he's been flipping properties in Riverside for 30 years. This is the kind of on-the-ground expertise the hedge funds are relying on.

“You can’t come in here with a hedge fund and say, hey, I got $3 billion to buy Riverside properties and go start buying properties,” O’Rafferty said. “You don’t know what the resale is going to be, what the neighborhoods going to be [or] the repair costs."

One of the stops on the tour was at a house that O’Rafferty recently remodeled. It was a 1,200-square-foot house on a corner lot with a freshly mowed lawn and three small shrubs next to the entrance. This is what O’Rafferty refers to as the “gold standard” for entry-level homes.

“I listed this on a Friday. By Monday I had 17 offers.”

Multiple offers are typical for O’Rafferty. He usually gets offers from three types of buyers: A smaller investor who can offer 50 percent down, a deep-pocketed investor -- usually a hedge fund -- who can pay cash in full, or a young family struggling to get a mortgage.

These days O’Rafferty sells primarily to investors. Two years ago he would have sold directly to a family, but not anymore.

“Now, do I want everyone to live in harmony and have a house and live peacefully and love their family? Yes, but at some point Bill has to make a living.” O’Rafferty says, referring to himself in the third person.“Which one are you going to pick?”

Lasa Velasquez-Hernadnez and her husband are that young family struggling to get a mortgage.

“It’s really difficult,” says Velasquez-Hernadnez. “We've been looking since the end of June, I believe, for a house and we've put in so many offers -- at least 10 offers -- we've been turned down left and right.”

Lasa, 30, works as an office manager and her husband, 29, does construction. They rent a two-bedroom apartment with their four kids and pay more in rent then what they could be paying on a mortgage.

They qualify for a $170,000 mortgage. Velasquez-Hernandez says there aren’t that many homes in that range “and the ones that we do find we’re getting out-bid on. We are being told is [that] all these people, mostly investors with cash, are getting the homes.”

Velasquez-Hernandez says her family has lowered their expectations since they started their search. All they want now is something in a safe neighborhood  with three bedrooms and a backyard so they can get a dog. “Sounds like the dream and that’s what we are looking for,” says Velasquez-Hernandez. “So we’ve just got to keep looking and we’ve got to stay positive even though it’s really hard right now.”

There are other factors contributing to the housing shortage besides investor demand. The Obama administration’s $75 billion loan modification program helped many people in foreclosure or underwater on their mortgage stay in their house. And more and more banks are doing loan modifications with customers in order to avoid potentially costly litigation.

All this means fewer houses going up for sale.

About the author

David Weinberg is a general assignment reporter at Marketplace.
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