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Valuation Blog 6.4.2013
Following the Footprints of Institutional Investors in Atlanta Real Estate: Part 3 of 3, Lessons from Atlanta

In Part One of this three part series we discussed how we can detect when institutional investors are active in a market. In Part Two we looked at specific examples from the Atlanta area. In Part Three we will focus on lessons learned.

Atlanta’s experience with hedge funds is still recent.  With time and money, their impact on local markets will become clearer.  However, Atlanta’s micro-markets provide us the opportunity to observe how hedge fund purchases affect housing markets in a small, controlled environment.

Hedge funds are not creating bubbles or overheating markets.  In the micro-markets where the hedge fund footprints were easiest to read, normal prices are still near trough levels.  Shrinking REO inventories and rising distress sale values have not had a significant impact on overall prices.  Indeed, in one of the four ZIPs we examined, 30311, prices for normal homes declined over the past year while REO prices increased

Hedge funds are keeping toxic foreclosures off local markets.  By buying up large lots of foreclosures before they become REOs and are listed for sale on local MLSs, hedge funds have greatly reduced the number of REOs selling at a discount.  Those that do make it into the MLS are selling at much less of a discount than they were before the hedge funds came to town.

Mass purchases of foreclosures by hedge funds are limiting opportunities for small investors and owner-occupants.  The impact of hedge fund purchases varies by locale.  The reduction in REOs is widespread throughout Atlanta’s micro-markets, even in those that have never experienced many foreclosures.  In areas where hedge funds have clearly reduced REOs to just a few, like 30318, intrepid investors can make a short trip east along Interstate 20 where REO supplies have been reduced less by hedge funds.

By forcing up REO prices, hedge funds have artificially destroyed the foreclosure discount so important to small investors.  While hedge funds are not creating bubbles in prices of normal homes, they may be doing so in REOs.  It makes no sense for an REO to sell above the price of a normal home, particularly when they provide the same living space.  Yet we found that to be the case in at least one area, 30311, where both REOs and short sales have been selling for more than normal homes for the past two quarters.  This behavior could only be the result of the inflationary impact of large hedge fund purchases in a small micro-market.

In the months to come, Atlanta will continue to experience the positive and negative effects of hedge fund purchases and the converting of foreclosures to single family rentals.  The city’s vast, diverse tapestry of neighborhoods and housing styles will provide clues as to how the actions of institutional investors might change other cities.