Smart money diving deep into buying homes again


The New York Times

David N. Miller, a master of bailouts, steps to the dais and coolly explains how the financial world went crazy.

It is February 2010. The anger behind Occupy Wall Street is building. Flicking through slides, Miller, a Treasury official working with the department’s $700 billion Troubled Asset Relief Program, lays out what caused the housing bubble: easy credit, shoddy banking, feeble regulation, and on and on.

“History has demonstrated that the financial system overall — not every piece of it, but overall — is a force for good, even if it goes off track from time to time,” Miller tells a symposium at Columbia University in remarks posted on YouTube. “As we’ve experienced, sometimes this system breaks down.”

But, it turns out, sometimes when the system breaks down, there is money to be made.

Miller, who arrived at the Treasury after working at Goldman Sachs, described himself as a “recovering banker” in the video. Today, he has slipped back through the revolving door between Washington and Wall Street. This time, he has gone the other way, in a new company, Silver Bay Realty, which is about to go public. He is back in the investment game and out to make money with a play that was at the center of the financial crisis: American housing.

As the foreclosure crisis grinds on, knowledgeable, cash-rich investors are doing something that still gives many ordinary Americans pause: They are leaping headlong into the housing market. And not just into tricky mortgage investments, collateralized this or securitized that, but actual houses.

A flurry of private-equity giants and hedge funds have spent billions of dollars to buy thousands of foreclosed single-family homes. They are acquiring them on the cheap through bank auctions, multiple listing services, short sales and bulk purchases from local investors in need of cash, with plans to fix up the properties, rent them out and watch their values soar as the industry rebounds. They have raised as much as $8 billion to invest, according to Jade Rahmani, an analyst at Keefe Bruyette & Woods.

The Blackstone Group, the New York private-equity firm run by Stephen A. Schwarzman, has spent more than $1 billion to buy 6,500 single-family homes so far this year, 80 or more in Sarasota and Manatee counties since early October. The Colony Capital Group, headed by Los Angeles billionaire Thomas J. Barrack Jr., has bought 4,000.

Perhaps no investment company is staking more on this strategy, and asking stock-market investors to do the same, than the one Miller is involved with, Silver Bay Realty Trust of Minnetonka, Minn. Silver Bay is the brainchild of Two Harbors Investment, a publicly traded mortgage real estate investment trust that invests in securities backed by home mortgages.

In January, Two Harbors branched out into buying actual homes and placed them in a unit called Silver Bay. It offered few details at the time, leaving analysts guessing about where it was headed. Two Harbors shares, which recently traded at $11.66, are up about 25 percent in 2012.

Two Harbors now plans to spin off Silver Bay into a separately traded public REIT. The new company will combine Silver Bay’s portfolio with Provident Real Estate Advisors’ 880-property portfolio. Silver Bay will focus on homes in Arizona, California, Florida, Georgia, North Carolina and Nevada, states where prices fell hard when the bottom dropped out.

In a filing with the Securities and Exchange Commission last week, Silver Bay said it planned to offer 13.25 million shares at an initial price of $18 to $20 a share. But it’s no slam dunk. While home prices nationwide have begun to recover, they could fall again if the economy falters anew.

Last modified: December 30, 2012
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