real estate, real estate marketHome prices are rising at a double-digit rate, surprising experts and consumers alike. In some California markets, real estate prices are zooming so fast that they have ignited bidding wars and raised concerns that these real estate markets are facing another bubble—and subsequent crash.

A number of factors are contributing to rising prices. The most important is extraordinarily low inventories of homes for sale. This reduced supply of homes is the result of large numbers of underwater homeowners who are frozen in place because they owe more of their homes than they are worth, as well as declining numbers of foreclosures for sale and prices that are still too low for homeowners who bought their homes eight to 12 years ago to sell at a profit.

On the demand side, after waiting years for prices to bottom out, millions of buyers are now scrambling to buy before prices and interest rates rise any further.

However, many observers think other factors are at work. The abruptness with and amount by which prices rose—measured at 10.2 percent year-over-year through March by Case-Shiller—may be due in part to the activities of a relatively invisible invasion of a new class of buyers.

Hedge funds are buying real estate for investment.

Over the past two years, as many as 50 well-financed institutional investment funds, also called hedge funds, have been buying up large numbers of single family homes to rent out in order to generate long-term returns for their investors. Following in the footsteps of millions of individual and small investors (many of whom realize 8 percent to 10 percent returns on their investments), the hedge funds are adding to their real estate assets from the 14 million single family rentals that are worth an estimated $2.8 trillion, according to Goldman Sachs Group Inc.

Hedge funds have reportedly spent an estimated $8 billion to $10 billion buying tens of thousands of foreclosures over the past 18 months. The largest, Blackstone Group, has reportedly spent $4.5 billion alone.

Several real estate analytics firms have conducted research into whether hedge funds have actually had an impact on home prices. Because hedge fund purchases have been highly concentrated in a handful of markets with large numbers of foreclosures, their impact on local markets has been relatively easy to track and measure.

In California, PropertyRadar found that large investor purchase activity was concentrated in only a few counties, but in those counties was a significant percentage of total sales. Solano County, for example, topped the list with LLC and LP purchases representing 16.1 percent and 21.5 percent of total sales in 2012 and 2013, respectively. Sacramento County came in second with LLC and LP purchases representing 11.0 percent and 13.9 percent of total sales in 2012 and 2013.

“Institutional investors have been attracted to the California market by the strong return on investment that rental properties have offered since 2008,” said PropertyRadar’s Sean O’Toole on his blog. “As prices increase, however, the potential return on new investments declines. As such, the rapid increases in prices we have recently seen are a double-edged sword. On the one hand, the increases reduce negative equity helping underwater homeowners. On the other, they reduce affordability for homebuyers and the potential returns for investors.”

So, what does this mean for home prices?

Home Value Forecast, a strategic partnership between Pro Teck Valuation Services and Collateral Analytics, conducted a ZIP code level analysis of foreclosure sales and trends in Atlanta, a hot market for hedge funds. It found that hedge funds are not creating bubbles or overheating markets.

In the micro-markets where the hedge fund footprints were easiest to read, prices of non-distressed homes are still near their lowest levels. Shrinking REO inventories and rising distressed sale values have not had a significant impact on overall prices. In fact, in one of the four ZIP codes it examined, prices for non-distressed homes declined over the past year while REO prices increased.

Another research firm, Radar Logic, also studied Atlanta on a five-county macro level and found that hedge funds are able to buy properties for less than the market rate. While 90 percent of all Atlanta homebuyers paid between $45,000 and $499,400 in February, 90 percent of institutional investors paid between $39,300 and $232,100.

Over a 12-month period ending in February, Radar Logic reported both investors and non-investors paid more per square foot. For buyers other than institutional investors, the median price paid per square foot increased 20 percent over the last year, while the price paid by institutional investors surged 65 percent. However, institutional investors paid 34 percent less per square foot compared to other buyers in February.

In sum, no one has found hard evidence to date that hedge funds are increasing the prices of non-distressed homes, even in the markets where those hedge funds are active. While hedge funds are depleting supplies of foreclosures, investors are able to buy them at a discount because they buy large numbers of homes, usually before the homes are listed for sale to the public.

Hedge fund investors are suffering along with smaller investors. Higher prices reduce their return on investment and their potential profits. At least one large institutional investor, Carrington Mortgage Holdings, recently announced it would stop buying, and a national survey of investors found that nearly half plan to cut back on their purchases over the next year.

Steve Cook is executive vice president of Reecon Advisors and covers government and industry news for the Reecon Advisory Report. He is a member of the National Press Club, the Public Relations Society of America, and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate companies, financial services companies, and trade associations, including some of the leading companies in online residential real estate.