Home Prices Soar on Short Supply, Investor Demand

Home prices in Atlanta were up 10 percent in December from a year ago, but a year ago they were down 17 percent year-over-year, on the S&P/Case Shiller Index. What changed? Investors. As Atlanta's foreclosure rate soared, investors, no longer finding the big bargains out West, began moving into Atlanta and snatching up distressed properties at a brisk pace.

"Market prices have to go higher to provide incentives for more new houses to be built," said Aaron Edelheit, CEO of Atlanta-based The American Home, a company that invests in distressed properties and turns them into rentals. "I believe we are on the cusp of a massive housing shortage in many parts of the country due to the historic lack of residential investment in the last five years. This summer, I expect the housing market to be 'blue flame' hot."

(Read More: What Tops Home Buyers' Wish List Now)

Prices today are rising fast because supplies of homes for sale are so low. Both new and existing homes are running near four month supplies.

For new homes, builders just aren't able to start fast enough, due to labor and land restraints.

For existing homes, there are fewer distressed properties for sale, a segment that has driven the market into recovery, and organic homeowners are either unwilling to list their homes for fear of selling at the bottom, or unable to list because they are still underwater on their mortgages.

(Read More: Foreclosures Fall Due to New Laws)

"Taking new and existing homes together, the relationship between the months' supply of unsold homes and house prices points to an acceleration in the pace of house prices gains in the year ahead," said Paul Diggle of Capital Economics.

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Private Investor Says Don't Enter into Foreclosures Lightly

Published: Friday, 28 Oct 2011 | 2:01 PM ET I thought I would share a response to yesterday's blog post on the Obama Administration considering selling Fannie and Freddie's foreclosed properties in bulk to private investors.

Rick Sharga used to work, and speak, for RealtyTrac, a well-known foreclosure sale site and tracker. He recently jumped ship to join Carrington Mortgage Holdings, which does everything from asset management to residential mortgage origination, servicing and property management.

Here's Sharga's take:

"Your post today made its way through our offices pretty quickly, as we’ve been doing REO rentals for several thousand properties in our own portfolio for several years, and as part of Fannie Mae’s Tenant-in-Place program. We’d probably be one of the companies you mentioned who would be interested in buying some of the GSE REO assets and turning them into rental units for some period of time. But it’s not an investment to enter into lightly. 

(*Note: REO's: Real estate-owned properties are those acquired by a lender, whether a bank or the government, after an unsuccessful auction attempt.)

This isn’t the slam dunk success story for investors that some of your sources suggested today. Rental margins can be extremely thin, the probability of success varies wildly from market to market, and an investor who doesn’t understand how the financials work could be in for a rather rude awakening. Managing a large portfolio of properties across the country isn’t exactly a walk in the park either, and there aren’t a lot of companies with the infrastructure to support that sort of initiative right now.

We do think that the idea makes a lot of sense from an overall housing market perspective. Done properly, it will remove a large number of distressed properties from sales inventory (and from the dreaded shadow inventory) which should help to stabilize home prices – and, in some markets, help stabilize rapidly-rising rental rates by adding rental inventory. It would take large sums of capital that are currently on the sidelines, and put them to use, which would be a boon for the economy. It would allow the GSEs to cap their losses on these REOs, and protect the values of their portfolios of performing loans. To your point, it would clear up much of the uncertainty in the housing market today by removing the overhang of distressed properties. And the timing is right, as there appears to be a growing demand for rental housing, while many potential buyers repair their credit, try to save money for a down payment, or just decide to wait out the market before they buy.

It’s not a panacea, but could be one of the best ideas to come along since the foreclosure tsunami hit. We’re just not sure how big a wave of investors we’re likely to see once people actually do the math."

Questions?  Comments?  document.write("");document.write("RealtyCheck"+"@"+"cnbc.com");document.write('');And follow me on Twitter @Diana_Olick

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Restoring Neverland: Investor Tom Barrack speaks to...

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