Boasting of spending up to $8 billion dollars to buy tens of thousands of foreclosures to convert into single family rentals, nearly 50 Wall Street investment firms set real estate markets on fire over the past 18 months. Now they are running for cover as soaring prices water down their return on investment.

The winds have already started to shift in the single-family rental business, according to data from RadarLogic. The composite price per square foot paid by institutional investors in 25 of the largest metropolitan area housing markets increased 14.4 percent year over year in March. Over the same period, asking prices for rents have increased just 2.4 percent, according to Trulia, Inc. As a result, yields on single-family rentals are declining.

During the twelve months ending March 2013, purchases of residential real estate by corporations, partnerships and investment trusts in the 25 metropolitan areas included in the RPX Composite increased 41 percent. To put this figure in context, purchases by all other buyers increased only two percent during the same time period. Across the 25 metropolitan areas, institutional investor purchases accounted for 12.2 percent of all property transactions in March 2013, up from 8.8 percent in March 2012, reported RadarLogic.

Conditions for purchasing investment properties have worked in most markets during the intervening weeks. Since March, the median year-over-year list price has risen 2.63 percent according to Realtor.com and much more in some markets where hedge funds have been active like Oakland (up 12.77 percent in April), Las Vegas (up 7.25 in April), Phoenix (up 4.09 percent in April) and Atlanta (up 2.94 percent in April).

A Bloomberg Businessweek article last week reported two smaller investment funds have curtailed purchases. Och-Ziff pulled out of the business last fall and Carrington Mortgage Holdings has stopped buying. The Bloomberg piece by John Gittelsohn reported that funds are buying property now, including homes sold by Carrington, for rents that yield 6 percent to 8 percent a year, before costs such as insurance, taxes and vacancies, according to Bruce Rose, Carrington’s CEO. Carrington’s model called for mid-single digit net returns on annual rents on an unlevered basis, according to Rose. While returns would vary by market, they would generally be in the mid- to high teens over the duration of the holding period, with the profit from home price appreciation.

However, a spokesman for the largest institutional, Blackstone, said, “We’re continuing to purchase homes where they fit into our business plan.”

Soaring Prices Slow Hedge Funds | RealEstateEconomyWatch.com.