Investor frenzy over housing has peaked

FORTUNE – When the U.S. housing market crashed in 2007, millions lost their homes to foreclosure. With their finances in shambles, they picked up the pieces by renting rather than buying. Big institutional investors quickly caught on, snapping up foreclosed properties on the cheap and renting them out.

All this has helped drive the recovery we’re seeing today: Investors effectively absorbed the excess inventory of homes for sale, which in turn has helped push home prices higher. Prices for rentals have also risen rapidly, as families who either lost their homes or put off buying found rentals to live in.

While this has gone on for some time, the investor frenzy might have peaked. Rents for single-family homes have essentially flattened — rising just 0.1% in March from a year earlier, according to a report released Thursday by real estate listing website Trulia. What’s more, in some cities where investors had the biggest appetite for properties on the cheap, rents have fallen: Take Los Angeles, where rents fell 1.9%; rents in Orange County slipped down 0.7%; Las Vegas saw a 1.9% drop. And in two other key investor markets — Atlanta and Phoenix — single-family home rents remained flat, rising less than 1%.

Meanwhile, rents for apartments have continued to rise, climbing 2.9% in March from a year earlier.

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The change suggests good news. It hints that the broader housing market is normalizing, as the role of big investors in the recovery wanes. They bought so many properties that the supply of single-family homes for rent has met demand. Nationally, there were nearly 4 million more homes for rent in 2012 since the housing market last peaked in 2005. With rents softening, investors may start selling off their properties, adding to the tight supply of homes for sale, says Jed Kolko, Trulia’s economist.

Of course, there’s risk that this could dampen momentum of the recovery. Some have argued that once big investors stopped buying, home sales and subsequently home prices could start flattening then falling again.

There’s more to it, however. While institutional investors have played a big role in reversing the housing market, their part isn’t as big as some might think. Investors fall under two categories: There’s the big corporate kind. And then there’s the individual investor: High earners who buy multiple homes.

The Wall Street Journal
highlighted recently, small investors accounted for a good chunk of home sales in areas where the Blackstones  of the world also drove sales. In Phoenix, small investors who bought more than five homes accounted for 26% of home sales at the end of 2012; Atlanta, 24% and Las Vegas, 22%.

It might not make financial sense for institutional investors to keep buying if the payoff continues to soften, but it could be different for small investors. They may very well still be willing to buy, analysts say.

“If all the big funds went out of business today, we’d still be talking about investors,” says a housing analyst quoted in the Journal.

And as for renters in search of single-family homes, they might enjoy cheaper rent.

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