It’s no secret that institutionalized funds have changed the markets in the most areas that were hit hardest by the foreclosure crisis. The criticism is that they are taking advantage of the system, profiting at the expense of the average buyer in the market today.
John Husing, an economist specializing in Inland Empire says, "They create the problem — and now they are taking advantage of the problem." He also says that the way they are creating a stream of rental income and transforming it into securities is a dangerous game and structured very much the same way that caused the mortgage bubble.
This argument of taking homes away from regular home buyers, making the market more competitive and creating multiple offers on homes, is a valid one, but currently there aren’t enough regular buyers that can qualify for a loan. The part that really upsets buyers is paying more due to the competitive market. So the regular buyers don’t get to take advantage of the prices a lot of investors have.
The largest reason for this is they are late to the game. Had they bought 2 or 3 years ago, they would have had the same opportunity. In Southern California alone, the median price has increased 21% in the last year.
The problem is more apparent in the western markets. Demand is high, acquisitions are more competitive and there is less inventory. Even investors are scrambling to find better deals which are forcing investment firms to buy of the REO market which does put them in direct competition with a regular home buyer.
Nick Halaris, co-founder of AH Capital, a company that is well known for “fixing and flipping” foreclosed homes in South Los Angeles, says it has caused “auction fever” on the west coast.
"I think it's crazy, their strategy, especially in L.A. or major markets, because we have managed portfolios of single-family rentals in different places. The expense ratios are out of control, so I am not sure these plans are going to pan out."
For private firms just jumping into the game, like Invitation Homes, a sub group of Blackstone, it could be an issue of can build a large enough portfolio?
Invitation Homes only bought their first distressed property last May and now have 200 homes in their portfolio. They are concentrating their efforts in the San Fernando Valley area. Nothing compared to Blackstone’s 20,000 homes. Nonetheless, they feel like they are contributing back to these communities, or as an article in the Chicago Tribune puts it; “These firms say they've invented a new investment strategy that also serves the public good by fueling the housing recovery and sprucing up homes.”
Mark Beisswanger, CEO of Invitation Homes says, "We feel good about being able to fix up what is generally one of the worst houses on the street."
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