Quick Hits—Foreclosure market draws huge private equity investment

I’ve been meaning to point this out for a while. The huge U.S. market in foreclosed homes is drawing “private equity” — money from investment and equity funds — which sees the situation as a massive “buying opportunity.”

Bloomberg from about a month ago (my emphasis):

Private equity firms are jumping into distressed housing as the U.S. government plans to market 200,000 foreclosed homes as rentals to speed up the economic recovery.

GTIS Partners will spend $1 billion by 2016 acquiring single-family homes to manage as rentals, Thomas Shapiro, the fund’s founder said. That followed announcements this month that GI Partners, a Menlo Park private equity fund, expects to invest $1 billion, and Los Angeles-based Oaktree Capital Management LP will spend $450 million on similar housing.

“It’s a massive market,” Shapiro said in a telephone interview from New York. “We’re starting to see this as a billion dollar opportunity to buy rental housing.”

I can’t comment on what the government is doing. That’s not the point of this post, and the article has more on that. I don’t know if the government offering is corrupt, a good deal for the economy, neither, or both.

I just want to point out three things:

(1) The market in foreclosed homes really is large:

About 7.5 million homes with a current market value of $1 trillion will be liquidated through foreclosures or other distressed sales by 2016, according to an Oct. 27 report by Chang.

(2) Big Boy money is flooding into this market, at least via these FHFA (which includes Fannie and Freddie) offerings. Is this because the government is dumping homes (as a stimulus to buying, presumably)? Or because the equity managers see this as a low, a place where they expect buying to start on its own?

I’m not sure. I do know that homes were once owned by us smalls are now in the hands of the bigs. All fair game, of course, but it shows you what happens in a crisis — the dinos lunch on the proto-primates and everything they own.

(3) As we’ve said before, the first time back in 2010 — In a deflationary market (which describes housing perfectly), cash is king. The value of cash rises just by existing, simultaneous with (in fact, because of) the fall of the value of things.

Or, as we wrote then:

Prices express the relationship between “things” and “money”. It’s like they’re on opposite ends of a child’s teeter-totter. When things go up in value, money goes down, and vice versa. One of the two is always gaining in value.

In inflationary times, things gain value and money loses value (i.e., the dollar buys less). In deflationary times, money gains value and things lose value (i.e., the dollar buys more).

Keep that last in mind. If you own things in inflationary times, you’re in great shape. Things (your house, for example) are gaining in value. To do well in deflationary times, you need to own money, not things.

We currently have a small amount of inflation in the general economy, but many markets have been deflating for a while; housing is one of them.

Are the bigs indicating that this is a time for us to buy (those of us who can)? Not sure. This may be a one-time government-driven opportunity — which just happens to benefit said bigs.

But the general point is true: Hold onto your cash if you can, even at 0.01% interest. It appreciates in buying power the longer this economy fails to recover.


(To follow on Twitter or to send links: @Gaius_Publius)

Gaius Publius is a professional writer living on the West Coast of the United States.

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