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Tags: Elliman Magazine
Almost two years ago the real estate new development world was rocked by the New York Times epic page one story by Louise Story and Stephanie Saul about foreign investment in U.S. real estate. The vehicle for “Towers of Secrecy” purchases was the ubiquitous LLC shell corporation. While I’m no advocate of illegal activity for the sake of preserving the health of a real estate market, I was very skeptical and outspoken about the challenge of measuring the impact of this new rule. Especially since the new development market had already started to show signs of over supply by mid 2014 in both Manhattan above $3M and Miami above $1M. It also seemed to single out wealthy buyers who did not want to get a mortgage. How could the effectiveness of this six month rule be measured reliably enough to be extended or made permanent when the market was already falling?
Since these series of articles came out, I have learned a lot more about the scale of kleptocracy around the world and more appreciative of what the rule attempted to accomplish.
Fast forward to 2017 and the super lux (≥$5M) new development condo market cooled sharply. The rule has been extended but is now up for renewal in a month. It is not clear whether the new administration will renew it. Nicholas Nehamas of the Miami Herald penned are great recap of the rule status. To make it even better, he included a YouTube video of bulldozers playing chicken in the piece.
I have to say I admire the messaging that came out of Homeland Security to justify the rule’s impact. Whether or not the following is an exageration, the mere existance of the rule is probably an effective deterent.
“We don’t come across [money laundering in real estate] once every 10 or 12 cases,” said John Tobon, U.S. Homeland Security Investigations Deputy Special Agent in Charge for South Florida. “We come across real estate being purchased with illicit funds once every other case.”
Here are the areas current covered by the Treasury rule.
Using the parameters of the rule, the Miami Herald asked that I analyze sales in the five boroughs of NYC since enactment. I stuck with condos and 1-3 families since co-ops tend not be a preferred property type of foreign buyers. I found that sales dropped 6% year over year for the aggregate of Manhattan sales over $3M and the outer borough sales of $1.5M. This included legacy contracts that closed during the rule enactment period but went to contract before it started. Those sales likely softened the actual decline in sales.
While it appears reasonable that the rule had some drag on demand, a possible repeal in February won’t likely have much of an impact on the oversupply that currently exists.
Last week a newsletter from John Burns Consulting got big SEO points by exclaiming that Wall Street Has It Wrong: Luxury Home Sales Increasing. Normally his firm is a good source of housing research, but this time they missed the mark on New York City, even when using facts.
While facts are provided and luxury sales are rising in markets like DC, there is a lack of proper context and this is a challenge that national analysts face when looking at specific market subsets. In this analysis, the luxury market was arbitrarily defined as having a $600,000 threshold. In a number of high cost housing markets on the following chart, their luxury threshold is equivalent to the entry or middle market, which I agree, is booming.
I took a look at markets I report on: Kings County (Brooklyn) and Manhattan. Their respective median sales prices of $735,000 and $1,073,750 are higher than $600,000. The John Burns definition for luxury would include more than half of these respective housing markets.
Besides the random threshold selection, their reasons seem to be weak. This list of common perceptions that would explain our underestimate of the strength of the luxury sales market are provided by them. I provide a subsequent clarification for each.
1. New disclosure laws. Foreign-buyer activity has slowed in two high-profile markets, Manhattan and Miami, due to threat of enforcement of new disclosure laws that began in 2016.
The market in both of these markets actually slowed sharply well before the new disclosure laws were in place. And foreign buyer participation in NYC has long been over-hyped.
2. High-profile Florida second-home markets. High-priced homes have indeed slowed in two of the highest-profile second home markets in the country, Naples (Collier County) and Palm Beach. These are two of the six counties where sales have declined.
Again county-wide prices set way below the actual luxury market may be the problem. Within Palm Beach County, I cover Palm Beach and the luxury market starts just below $5 million. In arguably the most expensive city in this county, the median price for all property types is just below their $600,000 luxury threshold.
3. Fortune article on Greenwich, CT. The sales slowdown in high-profile Greenwich, CT, was featured in Fortune magazine. The article included some very misleading headlines about a national luxury slowdown that were supported only by the fact that prices have appreciated 5% at the high end compared to more appreciation at lower prices.
This is an odd interpretation of the Greenwich market. I track this market in my research, live near it and have relatives that live there. This Fortune article was not misleading. Prices have not appreciated 5% at the Greenwich high end and $600,000 might not even buy you a starter home there. In fact, their luxury market has still not recovered from housing bubble.
4. Increased $1 million new-home supply. New-home sales have slowed in a few new-home markets due to a surge in competitive supply. Coupling this surge in supply, builders have pushed prices too high in comparison to the resale competition due to rising costs.
Why is this perception wrong? Excess or rising luxury supply is apparent across the 28 markets I research.
5. Improving entry-level sales. Entry-level sales are also improving at a faster rate than higher-priced home sales. Indeed, the market for lower-priced homes is stronger, but that does not mean that luxury sales are struggling.
True, but I think the disconnect is just the opposite. The luxury market is soft so many market participants assume the entry level is soft as well and yet it is seeing heavy sales volume.
Since housing across the U.S. is softer at the top, Wall Street looks like they have been correct about luxury. Placing a uniform threshold across a slew of different U.S. housing markets doesn’t tell us anything. Stick to specifics since that’s where you provide solid research.
Note the “two comma” reference taken from the HBO show Silicon Valley:
Miller also rejects the thesis that Manhattan’s two-comma real estate prices were being fueled solely by foreign money and are now jeopardized by global uncertainty and a stronger dollar versus emerging market currencies.
There has been voluminous discussion in recent years about following and marketing to the high end of the demographic scale, especial the real estate market. It’s been the focus of much of the new housing development action of the past five years, especially in big U.S. coastal cities. The high end development market has been widely chronicled here and within my weekly Housing Notes newsletter.
For buyers in the super luxury housing market, owning multiple homes is less about a primary residence with a second home and more about owning “stops on the big circuit.”
And as the rich own a greater share of real estate, major cities like New York, Los Angeles and London are going through a kind of “resortification,” familiar to posh beach towns or ski resorts, as their populations become more seasonal.
For Manhattan, these birds are rare in February and squawking on all treetops (bad pun for super tall condo penthouses) at full capacity in June.
And no, I never liked that band.
It’s time to share my Three Cents Worth (3CW) on Curbed Miami, at the intersection of neighborhood and real estate in the Magic City. And I’m taking notes on the beach.
Check out my 3CW column on @CurbedMiami:
As we make our way through the second quarter (more than halfway!), I took a look at some trends extracted from the first quarter reports we prepare for Douglas Elliman. I went all out and created a four charter that addresses a number of issues born out of the financial crisis that still touch the current market..
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My latest Three Cents Worth column: Three Cents Worth: Miami Drill Down: Picking Up the Scraps of the Financial Crisis [Curbed]
Three Cents Worth Archive Curbed NY
Three Cents Worth Archive Curbed DC
Three Cents Worth Archive Curbed Miami
Three Cents Worth Archive Curbed Hamptons
Three Cents Worth Archive Curbed LA
Three Cents Worth Archive Curbed Ski
One of the great ironies of modern residential real estate has been the expansion in transparency of information, along with greater secrecy of ownership. I think the latter coincides with the much greater wealth that is being put into hard assets like real estate. Privacy and security are indeed very important to many, including the wealthy and especially those near the top of the financial pyramid. There is nothing sinister or unseemly about the desire for privacy. The use of limited liability corporations (LLCs) has been a legal vehicle (and a gift) from lawmakers who created it that allows people to keep certain transactions hidden from view. However the LLC also provides an opportunity for bad actors to shelter their often ill-gotten assets too.
Louise Story and Stephanie Saul of The New York Times have explored this in “Towers of Secrecy: Stream of Foreign Wealth Flows to Elite New York Real Estate,” an epic data visualization along the lines of “Snow Fall: The Avalanche at Tunnel Creek” This article is a must read covering the hypersensitive subject of high end real estate and privacy.
The ongoing debate about the dying middle class versus the booming fortunes of the wealthy, the lack of affordable housing versus the super-luxury residential tower boom and municipal governments grappling to keep construction and development moving forward to keep tax revenue flows coming in, have made this effort long overdue.
“Towers of Secrecy” is careful not to stereotype users of LLCs in high end real estate transactions as exclusively foreign buyers. Within the Manhattan market, foreign buyers are not the majority of overall high-end real estate purchasers. However they tend to be concentrated around the Midtown central business district (aka ‘Billionaires’ Row’) whereas domestic purchasers tend to favor markets found to the north and south of Midtown.
UPDATE There’s a great recap over on Curbed NY too:
Scandal-Plagued Foreigners Park Millions in Midtown Condos
Here are a few screenshots of the embedded videos within the “Towers of Secrecy” piece.
Since it’s the end of the year, I’ve been thinking about some of my favorite events 2014. This past November, I was invited to keynote and moderate the main panel at the Urban Land Institute’s, Southeast FL/Caribbean District Council’s Miami Condo Market Symposium.
My panel included the heavy hitters of condo development and brokerage in South Florida – who spoke candidly in front of a sold out venue at the Epic Residences & Hotel:
– Ugo Colombo, Founder, CMC Group Inc.
– Eduardo Costantini, Chairman, Consultatio Real Estate Inc.
– Richard LeFrak, Chairman & CEO, LeFrak Organization
– Howard Lorber, CEO, Vector Group Ltd. & Chairman, Douglas Elliman
– Jorge Perez, Chairman, CEO & Founder, The Related Group
A recap of my panel and the other speakers and panels…
Read my latest Bloomberg View column The $10 Million Home, Never Hotter. Please join the conversation over at Bloomberg View. Here’s an excerpt…
As the U.S. housing market cools from last year’s overheated state, sales of homes at the top haven’t been following the same script. Prices and sales at the upper reaches are soaring…
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Tags: $10 million
Knight Frank published their quarterly Prime Global Cities Index today and North America led the way as a region with a 14.5% rise in prices. “Prime” translates to “Luxury” in US housingspeak. We provide research for their Manhattan and Miami results through the Elliman Reports we prepare.
The report conclusion succinctly summarizes the state of high end housing today and speaks to the global phenomenon:
…the index’s annual increase of 6.2% in the year to June is above the long-run average of 4.6% recorded since Lehman’s collapse in the third quarter of 2008, underlining the extent to which prime property has become a favoured asset class globally.
Here’s the table…
According to New York City’s IBO, in 2012, there were actually 5 times more moves to Florida than to adjacent Connecticut.
However when breaking the movers into 2 categories: households with real income below and above $500,000, the results really change. New York, New Jersey and Connecticut enjoyed a large increase of high income movers from New York City. The California market share in this category of movers collapsed.
But it is important to recognize that the high wage earners only represent 1.8% of total movers. Florida is still the third most popular destination for movers from NYC who are mere mortals.
Here’s a jumbo infographic from Douglas Elliman covering the findings of the four market reports in South Florida we prepare for them. Thank goodness Matrix can handle super tall images.