Sunday, April 15, 2012

Make lemonade, of course

When life deals lemons, market forces (if left free to do so) provide the squeezing;
Waypoint, a private-equity real-estate fund with $150 million in assets, is pioneering a new approach to making money from the housing crash. Since 2007, investors have been trolling the cratered suburbs stretching from California to Florida for cheap houses to flip. And firms such as PennyMac Mortgage Investment Trust have sought value in subprime-mortgage-backed securities.
Waypoint, which owns 1,100 houses and is buying five more a day, is betting that converting foreclosures into rentals is a better way to make a profit. Other firms, such as Landsmith in San Francisco, are cropping up and pursuing the same strategy in Arizona, California and Nevada.
With many suburban homes selling for half their peak values and demand for rentals from prospective tenants climbing, Waypoint was earning an 8 to 9 percent return on its capital as of Dec. 31, according to a quarterly report it sends to clients. 
Pretty much what Adam Smith had in mind when he counseled, back in 1776, not to expect to get your needs filled by the benevolence of merchants but through their self-interest.  The real question is why this obvious response to the housing debacle took so long.  Maybe the much maligned financial services industry learned something new;

The home-rental market boasts a total property value of $3 trillion, according to Morgan Stanley housing analyst Oliver Chang. Yet institutions have long shunned it as too scattered and impractical to be profitable.
Wiel and Brien are using cloud computing, proprietary algorithms and iPads to create a virtual assembly line for buying, renovating and renting houses on a large scale. They're also betting that many former homeowners who have jobs but couldn't afford their mortgages will still want to live in the same communities as renters.

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