Goldman Sachs Group (NYSE: GS), the firm that famously survived the subprime mortgage crisis by essentially shorting the housing market has now reversed course. The firm is now raising money for a new fund that will buy home-loan bonds, which would benefit from an improving real estate market.
Although on a national scale home prices and sales have only recently begun rebounding, the long run potential remains, and the firm is seeking to capitalize on that expected appreciation. Housing debt can still be purchased at a deep discount thanks to the housing collapse of the past decade, and targeted investments offer an opportunity to tie investment returns to the brewing economic rebound.
The fund, known as the U.S. Housing Recovery Fund, is expected to finish its first round of capital raising and open April 1, and will focus it’s investments on senior ranked securities without government backing. Many of these investments currently carry unrated (junk) credit grades according to Bloomberg News, but their survival on a housing rebound could reap huge rewards. The current yield on many of these securities are in the 12%-15% range, far exceeding the returns of less risky bond portfolios.
Due to the collapse in home prices across the nation in recent years, homes are now reaching a near-record affordability, coupled by a better supply-and-demand balance and policy makers’ renewed focus on bolstering real estate. The New York based bank said in a document earlier this month “Stabilization in U.S. housing fundamentals is creating an attractive investment opportunity. Many of the ingredients are in place for continued improvement in housing.”
Goldman Sachs Asset Management is joining hedge-fund managers Kyle Bass and Metacapital Management LP in seeking cash for new mortgage funds. This may be a reflection of a wider emerging trend as well. Goldman is actually following firms including Cerberus Capital Management LP, CQS U.K. LLP and Canyon Partners LLC that started similar investment pools after prices slumped last year.
Although the news of the fund is largely positive, there remain significant headwinds towards it’s success. Risks for the fund include volatility if the sovereign-debt crisis worsens as well as illiquidity and uncertainty around future government housing policy. Further, although home prices are beginning to finally rebound, an overhang exists in the market, with a plethora of supply on the market which will need to clear the market before a long run growth can be resumed. The unemployment rate similarly poses a risk, but increased strengths in these areas could make these funds very popular in the coming years.