Last month the New Republic published a provocative article on hedge funds and real estate investing (Your New Landlord Works on Wall Street) by former TV producer David Dayen. He said out loud what many people have been whispering.

Dayen argued that Wall Street hedge funds, backed by billions from wealthy investors, are turning the once sleepy business of renting and managing houses into a festering real estate bubble that’s bound to burst and blow up everyone standing nearby, from tenants to hedge fund investors to homeowners to the entire national real estate economy. “It’s the next Wall Street gold rush, with all the warning signs of a renewed speculative bubble,” he said.

Another Bubble Brewing?

The essence of his case is that the billions hedge funds are pouring in the REO-to-rental business will jack up prices for distress sales far above their value as an asset.  Home values will follow and artificially inflate home prices once again, only to crash once more.  Two bubbles in less than ten years.  “There’s far less excuse for such nonchalance this time, coming just a few years after we saw the precise consequences of the bubble, and the means by which it grew,” he concluded.

In the interim, the funds will do a poor job rehabilitating the foreclosures they buy and make life miserable for their tenants, especially when compared to the “typical owner of a single-family property for rent is a local mom-and-pop business with a stake in the community who manage properties as a primary vocation.”

“For the most part, they have partnered with large property management companies to deal with day-to-day operations. The houses they purchase often come to them in substandard condition. And the management companies, with thin profit margins of their own, tend to renovate as little as possible before seeking renters,” writes Dayen.