Hedge funds crowd first-time buyers out of housing market

David Weinberg Dec 10, 2012

Hedge funds crowd first-time buyers out of housing market

David Weinberg 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.

The Inland Empire region of California is one of the most sought after markets for single-family homes. Bill O’Rafferty flips houses in the Inland Empire city of Riverside. He took me on a tour of the neighborhoods where he flips most of his houses.

“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.

“Now, do I want everyone to live in harmony and have a house and love their family? Yes, but at some point Bill has to make a living.”

First-time buyers simply can’t compete with the investors offering cash, some of whom are buying properties above retail cost. And investors don’t have to have worry about their credit score.

“That’s another factor,” says Steve Cook, managing editor of Real Estate Economy “Half of the people that apply for a mortgage don’t get it.”

A first-time buyer needs a FICA score of 750 to qualify for a loan. Cook says those high standards are a result of lending standards that were tightened after the housing crash. “And for good reason. But they haven’t loosened at all.”

Another reason fewer houses are on the market: Banks are doing more loan modification to avoid litigation and the Obama administration’s $75 billion loan modification program has helped more troubled homeowners stay in their houses.

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