A Good Time To Build Some Houses

A blog about business and economics.
March 21 2012 8:18 AM

A Good Time To Build Some Houses

People pass prefabricated apartment buildings standing in the Rostock-Evershagen district in Rostock, Germany

Photo by Carsten Koall/Getty Images.

A few years back we invented a marvelous series of new technologies around mortgage securitization that made it possible for people who used to be poor home-loan prospects to acquire mortgages. Thus the homeownership rate rose. With it came a structural shift in the building stock. You can own in a multi-family structure (I do) and you can rent in a single-family structure (I've done it) but typically we build single-family homes for sale and multi-family structures for rental. Thanks to this technological breakthrough we started building fewer multi-family homes (and fewer "manufactured" homes) and more traditional single family homes. Then it turned out that the technology was badly flawed, and based on a covert assumption that a sustained nationwide house price decline was impossible. It wasn't impossible and we regressed. Suddenly we had a net flow of people "losing their homes" creating many families with no house to live in (so they move in with a sibling or a parent) and many houses with nobody to live in them (a "shadow inventory" of foreclosures) which, when you think about it, is a nonsensical situation for a society to be in.

One of the most bullish investors is Carrington Capital Management, which has teamed up with Los Angeles-based OakTree Capital. They have created a $450 million fund to buy foreclosed homes in bulk and rent them out.

In a marketing document for one of its funds, Carrington claims that without using leverage or borrowed money it can generate an annual yield of 7 percent from rental income alone. Its long-term strategy is to package the fund into a publicly traded real estate investment trust. If that strategy is successful, Carrington projects investors can see an internal rate of return of 25 percent over three years.

A 7 percent yield in a climate where a 30-year treasury bond gets you a 3.46 yield is great. This implies that if you have good credit and can gain access to a low-rate traditional mortgage you should look very hard at it. And it implies that if you're well-capitalized, you should look very seriously at building some houses. If you're a municipality, you should look very seriously at your zoning code to see if there's something you can do to turn yourself into an attractive destination for this kind of homebuilding. There are sound reasons of logistics why rental housing and multi-family structures tend to go together.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.



Meet the New Bosses

How the Republicans would run the Senate.

Even by Russian Standards, Moscow’s Anti-War March Was Surprisingly Grim

I Wrote a Novel Envisioning a Nigerian Space Program. Then I Learned Nigeria Actually Has One.

The Best Thing About the People’s Climate March in NYC

Friends Was the Last Purely Pleasurable Sitcom

The Eye

This Whimsical Driverless Car Imagines Transportation in 2059

Medical Examiner

Did America Get Fat by Drinking Diet Soda?  

A high-profile study points the finger at artificial sweeteners.

The Government Is Giving Millions of Dollars in Electric-Car Subsidies to the Wrong Drivers

John Oliver Debunks the Miss America Pageant’s Claim That It Gives Out $45 Million in Scholarships

Trending News Channel
Sept. 20 2014 11:13 AM Watch Flashes of Lightning Created in a Lab  
  News & Politics
The World
Sept. 22 2014 12:30 PM Turkey Just Got Forty-Six Hostages Back From ISIS. How Did That Happen?
Sept. 22 2014 12:44 PM The U.S. Is So, So Far Behind Europe on Clean Energy
The Shortcut
Sept. 22 2014 12:31 PM Down With Loose Laces A simple trick to tighten your running shoes for good.
  Double X
The XX Factor
Sept. 22 2014 12:29 PM Escaping the Extreme Christian Fundamentalism of "Quiverfull"
  Slate Plus
Sept. 22 2014 8:08 AM Slate Voice: “Why Is So Much Honey Clover Honey?” Mike Vuolo shares the story of your honey.
Brow Beat
Sept. 22 2014 12:22 PM The Age of the Streaming TV Auteur
Future Tense
Sept. 22 2014 12:14 PM Family Court Rules That You Can Serve Someone With Legal Papers Over Facebook
  Health & Science
Sept. 22 2014 12:15 PM The Changing Face of Climate Change Will the leaders of the People’s Climate March now lead the movement?
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.