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Investors buying foreclosed U.S. homes might have less than two years to accumulate properties as competition and rising prices shrink the pool of cheap assets, according to Blackstone Group LP, the largest buyer.

“Prices are starting to move faster,” said Jonathan Gray, global head of real estate for Blackstone, which has invested about $1.5 billion this year in foreclosed homes. “That’s one of the risks that emerge as more people like us get into the space and as individual homeowner confidence grows. Frankly, buying a home today is pretty compelling.”

The opportunity for funds to buy homes at discounts could last less than two or three years, Gray said yesterday at the Bloomberg Commercial Real Estate Conference in New York as record-low mortgage rates and home prices down 40 percent from the peak entice individuals back into real estate. Atlanta, Phoenix, Las Vegas and other markets hit hard by the worst housing crisis since the Great Depression are rebounding as the economy improves and the supply of homes for sale shrinks.

Home Depot Inc., the largest U.S. home-improvement retailer, is the latest company to benefit from a housing recovery, reporting third-quarter earnings this week that beat analysts’ estimates.

“Geographically, the harder hit areas that were really the epicenter of the housing crisis appear to be on the mend,” Frank Blake, the company’s chairman and chief executive officer, said. “It has been consecutive, it has been consistent, so that is why we think it is healing.”

Price Gains

Home prices have risen year over year for seven consecutive months, which hasn’t happened since 2006, said Walter Molony, a spokesman for the National Association of Realtors.

The median price of a previously owned U.S. home rose 11.3 percent in September to $183,900, the biggest year-over-year gain since November, 2005, as inventories dwindled, the Washington-based National Association of Realtors said Oct. 19. That price is up 19 percent from January, when Blackstone started buying.

The number of homes for sale is drying up as demand improves, funds snap up foreclosed properties to rent out and owners remain reluctant to sell until prices rise further. Mortgages rates driven to record lows by Federal Reserve stimulus, along with a falling jobless rate, indicate sales will keep improving. Previously owned homes on the market dropped 3.3 percent in September to 2.32 million, the fewest for any September since 2002.

‘Beaten Down’

“The recovery in house prices could surprise people,” Gray said in a Bloomberg TV interview airing today on “Money Moves” with Deirdre Bolton. “They have just gotten beaten down so much and we’re not building enough to keep up with the population growth. Affordability is there. I think as homeowners get a little bit of confidence, we will steadily have more people lean toward buying homes, faster home price appreciation, which will be good for this investment strategy and good for the economy at large.”

“With rising sales and a sustained downtrend in housing inventory, we’re projecting the median existing-home price to rise 6 percent this year and 5 percent in 2013, with comparable gains in 2014,” Molony said. “However, if housing construction doesn’t return to normal, prices could accelerate.”

Even with the cost of borrowing at record lows, many potential homeowners lack the savings and income to buy, buoying the rental housing market and drawing in institutional investors.

Biggest Buyer

Blackstone, the world’s largest private-equity firm, has spent about $1.5 billion on 10,000 foreclosed properties in the U.S. this year, making it the biggest buyer of single-family homes in the country, Gray said. Blackstone has been buying $100 million of houses a week, Stephen Schwarzman, chairman of the New York-based firm, said during an Oct. 18 earnings call.

“This is the kind of thing that happens once -- every once in a while, where you see something that’s a market-turning trend and we are loading the boat,” Schwarzman said.

Blackstone fell 2.7 percent to $13.98 today in New York. It’s returned 0.5 percent, including dividends, during the past year, compared with 11 percent for the Standard & Poor’s 500 Index.

Thomas Barrack’s Colony Capital LLC, a private-equity firm, has bought about 5,500 homes since April, spending more than $500 million, and expects to reach $1.5 billion invested by the end of next year. Closely held Waypoint Homes has said it has bought about 2,500 homes and expects to have 10,000 homes by the end of next year.

REIT Plans

Blackstone, Colony and other investors buying homes in bulk to rent have said they could create real estate investment trusts out of the properties to take public, paying dividends from the rental income on the homes, similar to the wave of apartment REITs such as Equity Residential that went public in the early 1990s.

“There are differing opinions about whether the opportunity will continue beyond 2-3 years to buy houses at yields that make sense to institutional investors,” said Colin Wiel, co-founder and managing director of Waypoint Homes. “I believe this is an evergreen opportunity.”

While investment yields “will come down,” from about 7 percent today, excluding debt, to a level more in line with apartment-property yields, or about 5.5 percent, Wiel said, “I think institutional investors will be comfortable with that because the asset class will be ‘established’ by then.”

Blackstone paid less than $150,000 on average for homes that were valued during the 2006 peak at more than $300,000, Gray said. Blackstone has formed a company called Invitation Homes to focus on about 10 metropolitan areas that were particularly hard hit by the credit crisis. It has partnered with closely held Riverstone Residential Group based in Dallas to manage the properties.

‘Sizable Investment’

“It’s grown to be a sizable investment for us,” Gray said. “One of the key questions is, can you make this work?”

Blackstone plans to attract tenants by renovating the homes and providing better property management, Gray said. Because it’s buying homes after lenders have foreclosed, the properties generally are in poor condition and require investment to make them more livable.

“We’re coming in and deploying significant capital,” Gray said. “We’ve got to make this as efficient as possible,” he said. “I think it’s one of the barriers to entry. You have to make a huge infrastructure investment in order to execute.”

Owning 400 single-family homes spread out by geography, as opposed to one apartment building with 400 units, presents challenges for investors, Gray said. Blackstone is focused on about 10 markets, including Northern and Southern California, Phoenix, Tampa and Orlando in Florida, Atlanta, Chicago, Charlotte in North Carolina, Las Vegas and Seattle, he said.

One exit strategy for the firm is to sell stock to the public in the management company when the time is right, Gray said.

“We can create a business investors will want on an income basis,” he said. “I think we can create a real company that can be taken public.”