For decades, nearly all homes were bought by individuals, but the collapse in prices brought on by the housing crunch and Great Recession attracted large investors looking to make money buying and renting single-family homes.
The investments of such firms buoyed markets across the country in the past few years — but not in the Baltimore region, where they've shown little interest.
In the first six months of the year, institutional investors bought just 3 percent of all homes sold in Maryland, according to real estate information firm RealtyTrac, which considers institutional investors entities that buy 10 or more properties. In the Baltimore area, that number is even smaller — about 2.3 percent. In the most recent quarter, it was 1.9 percent.
During the same period nationwide, institutional investors represented about 4.9 percent of sales, the firm found.
The Baltimore region has a number of qualities that make it less attractive for investors, but primarily there's a smaller chance of turning a profit, economists and industry members said.
"I just don't think hedge funds saw as much opportunity for profit and return on their homes over the next several years, and that's why they haven't really been focused on Baltimore," said Jack McCabe, a real estate analyst and CEO of Florida-based McCabe Research and Consulting, which has done work for some of the firms. "I haven't ever heard one of them ask about the Baltimore market."
From 2001 through 2010, institutional investors represented an average of about 2 percent each quarter nationwide, according to RealtyTrac. But RealtyTrac found that average leaped to 5 percent between 2011 and 2013, resulting in an estimated 200,000 investor-owned properties across the country worth a total of $20 billion, according to a fact sheet prepared by U.S. Rep. Mark Takano of California, who hosted a briefing in April about the trend.
The larger investors, such as Blackstone Group, Colony Capital and American Homes 4 Rent, tend to seek newer, single-family construction in areas such as Arizona, California, Florida and Georgia, spending about $150,000 for each home, said Daren Blomquist, vice president of RealtyTrac.
In those areas, the recession produced a glut of discounted homes available through foreclosure, as well as high demand for rentals. Future expectations of job and population growth mean both home values and rents could rise. Already, prices have spiked in some of those markets.
By contrast, the median price of homes in the Baltimore metro area last month was $256,000 — $323,100 for a detached home — down about 3 percent from last year, according to RealEstate Business Intelligence, a subsidiary of the MRIS multiple list service. The state's rate of job creation and population growth also slowed.
"For whatever reason, Baltimore, at least as far as our data shows, has not hit their radar as a place they've started buying, at least in great quantities," Blomquist said. "They're looking for the low-hanging fruit."
In the Atlanta area last quarter, institutional investors accounted for 15.6 percent of sales; in Las Vegas, 14.4 percent; and in Jacksonville, Fla., 12.5 percent.
"We had one good year of buying and then a lot of competition," said Jack BeVier, principal at The Dominion Group, a Baltimore-based firm that owns about 475 properties in the city and started looking in Atlanta in 2011 after sales of distressed properties slowed in Baltimore.
Dominion ultimately bought about 700 homes in Atlanta, but the impact of the hedge funds on the market was immediate, BeVier said. Whole teams appeared on the courthouse steps for monthly foreclosure auctions, prompting eight bids where they used to be one. The hedge funds drove prices up 30 percent, he said.
BeVier said Dominion has since sold all but 65 of its Atlanta assets to the bigger players. The firm now manages about 250 properties in Atlanta and 550 in Baltimore, he said.
Institutional investor activity peaked in the first quarter of 2013, when it made up 6 percent of U.S. sales, according to RealtyTrac. The firm's recent data shows investor purchases starting to taper, as the companies move into the next phase of rehabbing, managing the homes and turning a profit, Blomquist said.
As the field has gotten more crowded, driving up prices, some also started looking in secondary markets such as Columbus, Ohio, in search of better deals, McCabe said.
But BeVier said Baltimore presents added challenges for investors: a stock of older homes with potential lead paint problems, a smaller supply that makes it difficult to operate on a large scale, and a reputation for being tenant-friendly.
The state's foreclosure process, which was overhauled by the legislature after the recession, also likely inhibits a burst of new distressed properties from entering the market and luring bigger players, said BeVier.
In the nearby counties, he added, well-priced inventory remains low.
"It's not something that we kind of see in the cards," BeVier said. Prices "haven't moved significantly. If somebody thought it was an opportunity to deploy institutional capital, I think they would already have done it."
And then there is the city's crime.
"It's because we're the heroin capital of the world, didn't you know?" joked Joe DiMaggio, executive director of the networking association Baltimore Real Estate Investors Association, referring to a recent National Geographic documentary about the city's drug trade. "Baltimore is Baltimore. We're still basically — I hate to say this — a second-rate city."
Last October, Blackstone announced its first single-family rental backed security, a $479.1 million bond backed by the stream of rental income from more than 3,000 homes. Colony Capital and American Homes 4 Rent quickly followed suit.
That kind of offering wouldn't be possible using homes from a place like Baltimore, said Cyrus Mojdehi, vice president of California-based Alliance RE Investments LLC, which he said owns about 1,100 rental properties in 15 metro areas nationwide, including roughly 100 in Baltimore
Mojdehi said his firm, which manages properties through affiliate American Rental Property Solutions, was drawn to the city by the combination of rock-bottom prices and relatively high rents. But it has found that actually collecting those rents is difficult.
"There's huge opportunity for the right institution or group that's extremely hands-on, extremely operational, but the vandalism and likelihood of finding a good tenant is just too risky for a lot of groups," he said. "Cash flow streams are anything but predictable."
In December, Federal Reserve economists said the interest from hedge funds helped stabilize some housing markets and increased offerings to families shut out of homeownership by the tighter credit environment. The report concluded that the industry was still too small to pose a risk to overall financial stability, but that could change if demand for the bonds increases.
As credit requirements loosen, more people will want to buy, creating vacancies, said McCabe, adding that he expects another global recession in the next three years, which would depress rental rates.
If the firms decide to sell their homes, that could also destabilize local markets, Blomquist said.
Some said the fact that investors don't find Baltimore appealing could shield it from problems if those ventures do not succeed.
"It's still a nascent industry and one that will still have to prove it's going to be lucrative for the long term," said RealtyTrac's Blomquist. "Especially if you have deep pockets like these big institutions have, acquiring the properties is not hard. The hard part is managing. … The verdict's still out on whether they've mastered that at this point."