Saturday, May 9, 2015

Mobilizing and upgrading idle, depreciated capital

Here's a Bloomberg article:

Real estate buyers seeking money to renovate and flip U.S. houses are getting help from some of the world’s biggest investment firms. 
Colony Capital Inc., Blackstone Group LP and Cerberus Capital Management are among the companies that have started making bridge loans to investors who buy homes to sell them quickly for a profit. 

The title of the article (likely not chosen by the author) is heavy on mood affiliation: "House flippers are back together with Wall St. What could possibly go wrong?"

Lately I've watched a few episodes of Flip or Flop, an HGTV show (on Netflix) that follows a couple who flip houses for a living. The show takes a fair amount of artistic license (producers: you can't portray your stars as living on the financial edge if they drive a custom Escalade), but it is a nice illustration of what flipping can do for the economy.

The houses are typically in pretty bad shape. Many of them were foreclosures. They have been sitting empty for some time. In some cases, the previous residents stole things or poured concrete down drains. Generally they are unlivable (well, by modern American middle class standards). The flippers buy the houses, do very nice renovations on them, then put them on the market within a month or two.

This is really good! Idle capital is a waste. Houses with concrete in their drains don't do us any good. Depreciation is bad. These people are making large additions to the US capital stock, so it's efficient to allocate resources to them (with all the usual caveats about overborrowing externalities, potential policy distortions, etc.). The economy needs this stuff; hence:

Home flippers are benefiting from rising prices, limited new construction and a shortage of inventory on the market.

And it makes sense for big, risk-neutral firms to play this game (see my brief conversation with Lucas Goodman about this).

There's also this:

The new lenders are focused on more experienced investors, many of whom have have established companies, rather than the amateurs that proliferated during the housing boom a decade ago. Today’s flippers are more sophisticated after the crash weeded out most of the weaker investors, Lewis said.

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