Wall Street Flipping Main Street Off Housing Rebound

Story updated with additional background.

NEW YORK ( TheStreet) -- Big wall street investors, flush with cash and hungry for yield, are quickly snapping up foreclosed homes, leaving traditional real estate "flippers" struggling to find a bargain in some bottoming housing markets.

The housing market has been showing signs of recovery in recent months as the inventory of foreclosed homes, which have depressed home prices, has begun to shrink.

Heavy investor demand for distressed properties and fewer foreclosures by banks as they explore other alternatives has helped even out the supply-demand dynamics in several markets.

A pilot program by housing giant Fannie Mae to sell foreclosed homes to institutional investors in bulk with the purpose of converting them into rentals has also been greeted enthusiastically on Wall Street.

Bank of America ( BAC) also has a deed- to- rental program.

KBW estimates that investors have raised between $6 billion and $8 billion in recent months in anticipation of bulk sales. Big players in this space include Blackstone ( BX), Kohlberg Kravitz Roberts ( KKR) and Oaktree Capital ( OAK).

However, the entry of big institutional investors into local markets has upset real estate agents and "mom and pop" investors, who complain that the value of homes are being artificially inflated again.

"Large investors are cannibalizing the inventory," says Zachary Kepes, who has been an investor in single and multi-family distressed assets in Maricopa County, Arizona for over a decade.

Kepes typically buys distressed homes at a discount, refurbishes them and sells them to an end user or investor or rents them out.

But he has found it hard to compete with the bulk buyers from Wall Street.

According to Kepes, private equity players and hedge funds are buying property in the area often at as much as 115% of market value, because they have money to throw around. These investors are satisfied with a cap rate- a measure of return on investments in real estate- of 5% to 6%.

That locks out investors like himself- flippers if you will- who would need a return of about 10% to profitably invest in a property, fix it up and resell it.

"All inventory at the bottom of the market exploded," says Kepes. "For one and a half years, the market was sedentary. I could buy homes easily. Now I have to re-cultivate my relationships with my contacts and ask short sale agents to give me the first right of refusal on a property."

Investors in other markets in Arizona, Caifornia and Nevada complain of similar experiences. Inventory in these markets have begun to tighten driving up prices quickly.

And while it would seem that rising home prices should give real estate agents a cause to cheer, they are not too happy with the trend of banks selling REOs (Real Estate Owned) in bulk to investors either.

Marge Peck, an Arizona-based real estate agent with over 30 years of experience who specializes in short sales, accuses Fannie Mae and banks of controlling housing inventory and supply, instead of allowing market forces to take over.

"Fannie Mae bundled 200 properties in Arizona into a bulk sale. Those properties never had a chance to be in the market," says Peck. She says the housing giant's plan to get rid of foreclosed homes is " kind of like going fishing where instead of using a hook and bait, you just point a gun in the water and blast the fish away."

Still, the experience in Arizona and California is likely to be vastly different from that in markets such as Illinois or Florida, where foreclosures follow a judicial process.

In testimony before Congress earlier this year, FHFA's senior associate director for housing Meg Burns said the REO to rental initiative was "highly inappropriate on a national scale," and that "markets are carefully selected, based on obvious market characteristics - an oversupply of single family homes for sale and a strong demand for rental housing."

Illionois-based MACK Companies is an example of one company that has actually capitalized on the institutional investor interest in single-family homes.

The company has been investing in single-family homes and converting them into rentals for the last 15 years. Now they are being approached by large institutional investors who are looking for property management companies with local knowledge to help manage their investments.

" The demand for rental units is real," says Eric Workman,VP Sales and Marketing at MACK Companies. "I do think some of the big money has priced the individual investor out of the market. You can see it in Phoenix, it is also beginning to happen in Atlanta."

In Illinois, where consolidation in the banking sector has been considerable, lenders are dealing with a large inventory of foreclosed homes acquired from target banks, which they are eager to get rid of.

Diana Peterson, executive vice president at Auctions by ATG, which offers commercial and residential properties through live and online auction platforms, says institutional investors are looking to do really big deals often at a 25% to 30% discount to market value.

Her company encourages individual investors who are interested in cherry picking properties to participate in a pre-auction bidding process or risk losing it to a bulk investor. "I keep hearing people at cocktail parties talk about this great ski-resort they saw in Utah and how they kept following it and following it and suddenly it went off the market," says Peterson.

Big investors looking to do bulk deals are not cherry picking. They hope the number of good properties would offset a few bad ones. "The local mom and pop investor does not have the ability to make a mistake on a large scale," says Workman.

Still, all the bulk buying is lifting the prices at the bottom of the market. Whether it is sustainable, no one knows.

"It is an election year," says Marge Peck bitterly. "The holidays are coming. Everyone just wants to hear good news."

-- Written by Shanthi Bharatwaj in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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