How Big Institutional Money Distorts Housing Prices

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.

Rest here…