Real Estate Investors betting on US Housing Market

by Property Management Software on December 14, 2012

US House Prices
US House Prices

THOSE feeling nostalgic for the boom before 2007 will have been heartened this week by headlines about Lehman Brothers selling a portfolio of American apartments for $6.5 billion. Lehman Brothers? No, the investment bank felled by the mortgage miasma is not rising from the dead: its administrators are merely flogging its remaining assets to repay creditors. But the sale shows that American housing, once so toxic it made the global economy choke, is once again attractive to investors. Hedge funds and private-equity firms, so often the villains, may be helping a housing revival.

America’s residential sector was once the preserve of “mom-and-pop” investors or local developers. The role of hedge funds became apparent only when those who bet massively against the housing market—“The Big Short”, as it was later termed—made billions while their rivals floundered. By gambling that subprime mortgages, extended to borrowers with no plausible means of repaying them, would poison the financial system, John Paulson personally pocketed $3 billion after his hedge fund skyrocketed.

The Big Long is now slowly taking shape. House prices have stabilised since their 2009 trough, and have even made small but steady gains in recent months. Investors convinced that a full-blown housing recovery is under way—a big “if”—are looking for ways to profit from it.

The most predictable of these is to invest in mortgages, or the very same residential mortgage-backed securities that were so avidly shorted in the run-up to the crisis. It is a deep pool: the $10 trillion of home loans outstanding is second only to equities as an asset class. Over half of these mortgages are tacitly guaranteed by the government, turning them into something akin to Treasury bonds. But packaged in tax-efficient structures to which large dollops of debt are added, these can kick yields up to the 10% range: not bad in a low-interest environment.

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