All this could have a significant impact on the housing recovery.

(Read More: Reverse Mortgages Backfiring on Seniors)

“If the investors gets sidelined—along with first-time buyers who are already sidelined—this housing market falls apart quickly,” says Mark Hanson, a California-based housing and mortgage analyst. Hanson points to still-high levels of negative equity, which has kept many homeowners stuck in place.

Connecticut-based Carrington Mortgage Holdings, a hedge fund that had been buying distressed homes, recently stopped.

“We think the market is a little bit too frothy,” said Carrington’s Rick Sharga in an interview last month. Home prices are now up 12 percent from a year ago nationally, according to CoreLogic, but have risen far more greatly in formerly distressed markets where investors originally focused their purchases.

“The general consensus right now is that the bargains are drying up when it comes to buying foreclosed properties,” adds Sharga.

(Read More: Rising Rates Turn Investors From REITs)

That is largely due to a lack of distressed homes for sale. The number of foreclosure sales in the first quarter of this year fell 22 percent from a year ago, according to RealtyTrac, a real estate website. The number of short sales, when the home is sold for less than the value of the mortgage, also fell, as rising prices provided less incentive for banks to agree to such deals. Some claim banks are actually holding onto repossessed homes, waiting for prices to rise higher.

Investors accounted for 19 percent of home sales in April, according to the National Association of Realtors, down from 24 percent in all of 2012. Investors include individual buyers as well as large hedge funds, but the hedge funds have been getting much of the attention, credited with juicing prices in the hardest hit housing markets like Phoenix and Las Vegas. Their so-called REO-to-Rent strategy (Real Estate Owned-to-Rent) has evolved into a new asset class, with two of the companies that engage in the practice going public this year as real estate investment trusts (REITs).

Article source: http://www.cnbc.com/id/100799067

Falling home prices at the turn of the year pushed more borrowers into a negative equity position, meaning they owe more on their mortgages than their homes are worth.

In Q4, 23 percent of borrowers nationwide, or 11.1 million, were holding “underwater” mortgages; that’s a collective $750 billion of negative equity, according to the latest survey from CoreLogic [ CLGX 18.14  +0.19 (+1.06%) ]. That’s up from 22.5 percent, or 10.8 million, in Q3, again, thanks to falling home prices. To make matters worse, 2.4 million borrowers have less than 5 percent equity in their homes, deemed as “near-negative” equity.

Of course negative equity is concentrated in the hardest hit states: Nevada (65 percent), Arizona (51 percent), Florida (47 percent), Michigan (36 percent) and California (32 percent). This as the consensus among housing watchers is that home prices will fall another 5 to 10 percent this year before slowly climbing back. That means negative equity will climb another ten percentage points.

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