NEW YORK ( CNBC) -- Home prices have been rising steadily for the past several months, but some fear the rapid increase could actually start hurting the housing recovery. The reason is that the rise in prices is mainly due to investors, mostly large hedge funds, that have been swooping into the most distressed markets and inhaling properties as fast as their plentiful cash will allow. They are turning those properties into rentals, and getting anywhere from 8 to 12 percent returns on their investments, thanks to still hot demand. The trouble is, as home prices rise, those returns shrink. "The worry with investment demand is that the very recovery in prices that it is driving will eventually reduce rental yields and undermine the investment case," warns Paul Diggle of Capital Economics. Today's housing recovery, much like the recent crash, is like no other. While home prices fell nationally for the first time in history, they are recovering locally at drastically different paces. Some markets are still in the red, while others are surging forward with double-digit gains. Those that are seeing the biggest jumps are largely the markets that saw the deepest losses. Witness Phoenix home prices up over 20% from a year ago on the S&P/Case-Shiller home price index. The huge influx of investors there shrunk inventories and created bidding wars, hence the price gains.
By Diana Olick, CNBC Correspondent
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