Investors Taking Advantage of the Real Estate Market

I've been reading recently of the very significant volume of residential purchasing being done by hedge funds and investors in general and, while we live in a democratic capitalist society, it troubles me.

Here we are just four years out from the devastating effects of the derivatives scandals and excesses and once more big money is manipulating and disrupting another part of American life, purely for profit.

Housing was once just that, a house, a place of comfort and refuge but now it's treated like an entire market to be manipulated, used by big-money interests for their gains regardless of the impact on the average American.

What's worse is that the hedge-fund buying is gathering up thousands and thousands of low-end real estate that otherwise would have been available as starter homes for Americans looking to establish credit, build some equity, join in the "American Dream." Instead, they are now in many cases forced to rent from these investor funds the very homes they might otherwise have been able to purchase. Worse, they may be renting the houses they once owned but were foreclosed on due to the abusive lending practice of putting people in submarket rates that escalated rapidly to excessive levels.

Who cares and why should we?  Anytime a 400-pound gorilla enters the ring, it's clear who's going to win: The gorilla every time. In this case it's again the hedge funds that are intending to skim the profits — first from rental income and later from the theoretical appreciation that will occur with time that otherwise could have helped lift tens of thousands of Americans to a better living standard. Now these Americans will pay rent and get nothing for it.

A recent Goldman Sachs study estimates that 60 percent of all real estate transactions are now in cash. Apart from a small percentage of the very wealthy who may purchase real estate for their personal use with cash, the balance of all these cash transactions are by hedge funds that have bought up masses of foreclosures from lenders. The proof of this trend is starkly evident when only as recently as five years ago the level of cash purchases was 5 percent.

It is a cruel and perverse irony that the very firms and individuals who brought the house of cards they erected down in the great financial meltdown of 2008 are now the ones picking apart the leftovers again for their gain, at the expense of the common American.

So the next time you read a news article about the shortage of inventory of homes for sale or price increases you will now remember that the cause is hedge-fund buying and not necessarily a sign of a robust and rebounding market based on average Americans getting back into their dream home.  

It's also important to realize that the shortage of listings on the market is not spread evenly around the nation. Those markets that were at the epicenter of the bubble-up and then the crash, like cities in Nevada, Florida, California and Arizona for example, are also now where the hedge funds have focused and are impacting the markets the most by buying a high percentage of the formerly troubled real estate.

In our region, the Boston market is bucking the trends and demonstrating strength from conventional buying. The greater Boston area thrives and continues to witness strong real estate trends due to the education, medical and technology base of its economy. New York City benefits as the financial capital of the world and as a magnet for a very high degree of foreign wealth as purchasers of high-end real estate.

Berkshire County, I am happy to say, typically doesn't experience the extremes of highs and lows of racier markets around the country but we are not immune to the trends either. There is very little speculative buying for flipping any longer but there has been a slight uptick in purchasing lower-end real estate for renting as an investment. Those buyers hope to achieve a positive cash flow in the short term and expect appreciation to yield a nice payday when they cash out. Time will tell how that works out.

There is very little spec building at present but a few courageous builders are doing that as a way to keep their crews going and to make up for a drop in new contract building.

With vast sums of money sloshing around in the banks and investment houses it's no wonder they keep looking for places to put their cash to work. Quantitative easing has pumped billions into the hands of these powerful firms and, as always, it works to their benefit and not typically for the benefit of the common man, the 99 percent and certainly not the bottom 20 percent.

Here in Berkshire County the majority are enjoying their homes as homes and not trying to turn them into cash machines. That's another reason I enjoy the Berkshires so much!

Paul Harsch, president and founder of Harsch Associates, a Berkshire County based real estate brokerage firm, is a licensed real estate broker in Massachusetts, New York and Vermont, serving a diverse residential, business, commercial and land client base for 40 years.