“Despite multi-billion dollar buying sprees by well-funded Wall Street hedge funds, real estate investors bought fewer properties in 2012 than they did in 2011, which was a record year for investors. Investment-home sales declined 2.1 percent to 1.21 million from 1.23 million in 2011, but those sales had been well under a million during the market downturn,” according to a new survey from the National Association of Realtors.

Meanwhile, previously surging single family rents are flattening. Nearly 4 million more single-family homes have been added to the rental market since 2005, according to Trulia.com. Supply has finally caught up with demand, with single family rents up just 0.1 percent in March from a year ago. That has housing bears roaring again.

(Read More: Deep Freeze: Home Sales Barely Budge in Spring)

“In Phoenix—like Las Vegas, Florida, the Inland Empire, Central Valley et al—we now have a rental supply glut,” said Mark Hanson, a California-based housing and mortgage analyst.

“Wherever the institutional money has gone in and ravaged is high risk for housing investment or building. These regions have become highly volatile speculative regions in which prices can rise 20 percent one year and fall 15 percent the next. The insti’s have turned these markets into something I have never seen before…more like high-beta, speculative, volatile tech stock markets than housing markets.”

Prices are soaring in these markets because all-cash investors are finding very little left to buy. Regular buyers can’t compete with investors, so they are heading to the home builders. The builders were caught off guard, because they did not foresee this dynamic. Now they are rushing back to meet demand, while having no idea how long that demand will last. Why? Because when home prices get high enough, investors could cash out, pushing inventories higher and prices lower.

The birth of the new asset class, the REO (bank owned foreclosures) to Rent model, put a floor on home prices and reduced distress dramatically in the market. It also, however, added a new volatility to housing for years to come.

If investors hold and rent the homes, recovery will continue apace, but if sentiment shifts, and investors see bigger returns in sales than rents, the game could turn quickly.

RealtyCheck producer Stephanie Dhue contributed to this report.

—By CNBC’s Diana Olick; Follow her on Twitter @Diana_Olick or on Facebook at facebook.com/DianaOlickCNBC

Questions? Comments? RealtyCheck@cnbc.com

Article source: http://www.cnbc.com/id/100627586

Nationally, rents rose 4.7 percent in August from a year ago, which, while still a gain, is down from the 5.8 percent annual increase in May – making it the slowest rise since March, according to Trulia.com. Some markets, however, are still hot, with rents up around 10 percent year over year. These include Houston and Seattle, Denver and San Francisco.

“Rents had been on fire earlier this year, but some of the hottest rental markets are starting to cool,” said Jed Kolko, Trulia’s Chief Economist. “New construction that started last year is finally coming onto the market, giving renters more choices and some relief from rising rents. Still, rents are climbing in nearly all of the major rental markets.”

Investors in the multi-family apartment space don’t seem concerned, as we noted in a post last week, with most saying that an improving housing market can peacefully co-exist with a strong rental market for a time, as long as rents don’t become completely unaffordable.

Much of the improvement in housing is thanks to investors, not regular home buyers. Witness yet another drop in weekly mortgage applications today, the fifth straight week, according to the Mortgage Bankers Association. Applications to purchase a home were down just under one percent. This as the rate on the 30-year fixed fell. Again that points to a continued strong rental market.

A new report from Rent.com quantified many of the reasons potential buyers are delaying home ownership: 47 percent are waiting to save a down payment , 11 percent are waiting for the real estate market to stabilize, 22 percent are waiting for their credit to improve to qualify for a home loan, and 20 percent are waiting to feel more secure about their employment situation.

A bright spot is that while construction spending on home renovations is falling, apparently renters are investing more in their spaces. 47 percent have spent more money in the last three years or plan to spend more to improve their rental units, according to Rent.com. 63 percent of renters planning to spend more are going to spend money on furniture and décor they can take with them.

Credit, attitudes toward home ownership and a still shaky housing recovery will likely hold the rental market in good stead for many years. An easing in rental rates is likely due to more supply coming on line in the multi-family sector, while single family rent strength will vary neighborhood to neighborhood.

Questions?  Comments?  And follow me on Twitter @Diana_Olick