Friday, December 19, 2008

A Real Estate Story

I don't have independent confirmation of this story, so there is a chance that it is inaccurate, but it came directly from a source, so I think it is probably accurate:

For those of you unfamiliar with New York's various social strata, the Hamptons is the preferred vacation area of NYC's moneyed class. The prices have been stratospheric over the last few years. As the national real estate market has weakened, there has been a reassuring conventional wisdom that Manhattan and Hamptons real estate was immune.

Well, this story suggests otherwise. A successful trader decided to take some cash and make some bids on property out there. He asked a real estate agent to show him five properties with asking prices of about $5 million each. After touring the stunning properties, he made bids on all five properties.

$1.25 million each.

Two sellers came back and hit his bid. At 25 cents on the dollar.

If this is true, it is so stunning as to be almost unbelievable. But before you scoff, consider some other assets.

S&P: trading 89, down from peak of 149 (down 40%)
Oil: trading 37, down from peak of 147 (down 75%)
Gasoline: trading .96, down from peak of 3.11 (down 69%)

Based on these numbers, it is certainly not inconceivable that real estate should be down 50-75% from the peak. Especially when you consider that the above assets are "productive" assets. They are "productive" in the sense that they should either be creating wealth (corporations), or they should be a necessary component in the creation of wealth (energy).

For the most part, residential real estate is not a productive asset; I don't see how you become more productive by living in a 10-bedroom house versus a 3-bedroom home. As an individual, you actually probably become less productive when upkeep and maintenance are included in the calculation.

When people upgrade their kitchen with granite counters, they like to tell themselves they are making an investment in their home, but this is largely incorrect. Capital investments should make the people involved more productive. In a home, such capital investments might be certain appliances (e.g washer/dryer) or improved internals (e.g. a more efficient heating system). But outside of these few components, larger, more lavish homes do not make the individuals living there any more productive, and again, when taxes, utility, and maintenance costs are considered, the individuals are arguably much less productive.

With all that said, 25 cents on the peak dollar sounds just about right.


Yo Gabba Gabba said...

Damn good post. Depressing, but damn good. BTW- I hear Obama is looking at Hilda Solis for Labor Secretary. I would wager that I am more familiar with her than any other Rep for a variety of reasons. All I'll say, Gamma, is you may be able to tell me, "I told you so," sooner than I thought.

Aztec Tomb said...

Come on, Solis is the only overtly liberal appointment so far.