05/30/2013 12:08 pm ET Updated May 31, 2013

As Home Prices Soar, Smart-Money Investors Head For The Exits

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Here is something sad about financial markets: By the time ordinary investors notice a market is rising, it is often too late: Smart money heads for the exits, while the dumb money rushes in, just in time for the selloff.

Take housing, for example: If you have merely glanced at the front page of any major American newspaper this week, you have seen fist-pumping headlines about how the housing market is soaring. National home prices are up more than 10 percent in March from a year earlier, the biggest gain in seven years.

But before you borrow against your new-found housing wealth to fill your home with flat-screens and Cheez Doodles, please note that some of the same investors who helped pump up the market are now getting out, Bloomberg Businessweek reported on Wednesday.

Though this doesn't necessarily portend another housing crash, it is a reminder of how shaky the recent rally in home prices has been, and of how we should keep that economy-is-all-fixed champagne on ice for a little while longer.

The magazine tells the tale of a California hedge fund called Carrington Holdings, which was one of the first investors to pump money into the $2.8 trillion market for rental houses. Carrington is now seeking greener pastures, as prices have soared and potential investment returns have fallen. And the neighborhood, so to speak, has really gone downhill lately, according to Carrington CEO Bruce Rose.

“There’s a lot of -- bluntly -- stupid money that jumped into the trade without any infrastructure, without any real capabilities and a kind of build-it-as-you-go mentality that we think is somewhat irresponsible," Rose told Bloomberg Businessweek.

Another pioneer in the buy-to-rent market that has backed out lately is the hedge fund Och-Ziff Capital Management Group, which stopped buying houses last fall. And Bloomberg Businessweek points out that several funds formed to buy and rent houses aren't exactly minting money, including American Residential Properties Inc. and Silver Bay Realty Trust -- both of which have publicly traded stock, and both of which lost money in the first quarter.

Some investors are still interested in buying houses, of course. The People's Republic of China, for example, might well be your next landlord.

But Carrington's Rose says he is waiting for the next housing "blowup" to get back into the market.

A few years after the previous housing blowup -- which began nearly seven years ago, believe it or not -- investors like Carrington and Och-Ziff took money from bigger investors like pension funds and hedge funds and pumped it into single-family homes that they fixed up and rented. The scheme promised a nice return at a time of rock-bottom interest rates. Now, purchases by hedge funds and revivified house-flippers have helped drive the housing market rebound that our national newspapers are so excited about.

But those investors have also crowded out individual buyers, as The Huffington Post's Ben Hallman wrote recently, many of whom are still struggling to get mortgage financing. With housing inventory still tight while wary homeowners keep their houses off the market, these investors have helped drive prices so high so quickly that we are already asking ourselves if housing is in yet another bubble.

It is probably too early to declare a true bubble just yet. Home prices are still far from their peak of the previous bubble, and many of the biggest gains recently have been in areas that suffered the most during the crash, including California, Arizona and Florida. Credit is still too hard to get for most prospective home buyers -- the days of being able to fog a mirror and get a mortgage are over. For now.

But the current boom is probably not sustainable. If many more investors start bailing out, particularly if the Federal Reserve is thinking about interest rates, the headlines could turn uglier. Buyer beware.



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