Housing Spillover and Powerball Aren’t Hunky Dory

I’m wrapping up this Housing Note as the stock market has already fallen 500 points (12:30pm) so hopefully this will take your mind off of your losses.

After the loss of David Bowie, I thought a lot about how much his music meant to me – from my college days through adult life. There was a period in college where he was all I listened to. I was hooked in by his Hunky Dory album although haven’t been listening to his work as much in recent years. His death reminded me how deep his talent really was so I’ve been revisiting it. Apparently I’m not alone.

davidbowiespotify

David Bowie (b. David Jones who reportedly changed his stage name to avoid confusion with lead singer of The Monkees – who died in 2012) was more than a musical and acting talent/artist. David Bowie was a financial innovator. Remember Bowie Bonds? Here’s a refresher piece on how he securitized his music catalog.

If securities don’t interest you, them I suspect that Powerball mania will. I’m not a fan of lotteries in general since people that can least afford to play, are often those that play the most. It feels a bit like cheating success. Still, my wife plays and I’m happy to share in the winnings.

The takeaways from this phenomenon are entertaining. Many won’t roll out of bed and play to win $100 million but get excited when it goes over $1 billion and the nearly impossible odds fall even further (since that’s real money). And many people have weird relationships with numbers (and what’s a mainstream number?):

 

Now that we’ve set the stage, lets talk about housing…

Of Wrecking Balls, Price Rent Ratios and Moral Hazard

In the latest housing boom, we’ve been deprived of one of the most visceral weapons of change – the wrecking ball. Here’s a terrific piece on wrecking balls in Atlas Obscura.

wreckingball

There’s also a great op-ed in the LA Times and a piece on Curbed Boston by NeighborhoodX founder Constantine Valhouli that explores the relationship between rents and prices by neighborhoods.

In thinking about the undercurrent of change in the housing market, specifically the new development space, I was reminded about how important it is to keep an open mind to new information rather than hunker down in the fetal position. And it’s always better to get along.

Tall Is The New Black

New York Yimby does a masterful job sussing out new development renderings from the NYC Department of Buildings. It’s simply incredible. Here’s a tour of what is coming up in 2016.

yimbytalls

Fed Invasion of High End Housing Privacy

In one of the more bombshell housing news moments released as breaking news this week, we learned that the U.S. Treasury has decided to review “illicit money flowing into luxury real estate” through a big New York Times piece by Louise Story U.S. Will Track Secret Buyers of Luxury Real Estate. shellmanhattan This action was inspired by the previous piece to an article she co-wrote last year called Towers of Secrecy that talked about the use of LLCs to hide assets.

shellcompanies

Here is the press release from FinCen (U.S. Treasury/IRS)

WASHINGTON – The Financial Crimes Enforcement Network (FinCEN) today issued Geographic Targeting Orders (GTO) that will temporarily require certain U.S. title insurance companies to identify the natural persons behind companies used to pay “all cash” for high-end residential real estate in the Borough of Manhattan in New York City, New York, and Miami-Dade County, Florida.

The New York Times, who must have more information than what has been publicly released, indicated that the focus was on properties above $3 million in Manhattan and $1 million in Miami. Here are a few thoughts and questions on this announcement:

  • Out of context – The New York Times coverage, while excellent and detailed, is out of context because gives the impression that the use of LLC’s and paying cash translates into illegal activity or that the implication that consumers are hiding their activities is somehow normal. The fact is, there is no such conclusion made in the article. There are certainly a handful of examples given and I agree that enforcement of money laundering is important. I wish the same zealous (or in fact any) federal response was made to Wall Street’s financial behavior during the credit bubble.

  • Not anticipated – Other than the New York Times story early last year, there has been no discussion or interest in the topic. There has been no whispering about it within the industry – not because it would be self-serving to keep it quiet – but because it isn’t a common belief that it is more about outlying behavior.

  • 6 months – This is not a permanent rule, but more of a test. If they were inspired by the NYT piece last year, they must be tentative on how deep the problem actually is.

  • Lack of clarity – What is presented in the press release is more basic than the details offered in the New York Times piece. What is the penalty to those who did something wrong and what exactly are they doing wrong?

  • Not my job – How can a U.S. title insurance company verify the beneficiary of an LLC, say in a country like China? It’s like the FHA asking appraisers to be responsible for things that are the purview of home inspectors – so now the FHA has a shortage of appraisers.

  • Wrongdoing implied – It overlays a message of wrongdoing for anyone wealthy enough not to need a mortgage or who uses an LLC to avoid the publicity. Manhattan (and Miami) are highly concentrated with high net worth individuals. Always have been. And many high net worth individuals want to live here. If I won the Powerball, it would be in my family’s interest and safety to keep my identity private if I was purchasing a super luxury condominium. Discretion has always been a pattern in high end real estate.

What will be the outcome of this temporary new Fed oversight?

  • Some cash buyers of high end real estate, especially the new development subset, will simply pause until this rule sunsets or everyone in the market gets a better understanding of the implications.

  • I’d hazard a guess that 75% of all Manhattan purchases above $3 million are all cash since according to our numbers, about half of all purchases marketwide are made with cash. Cash buyers have an advantage over those who use mortgages given the slowness and wariness of banks today. Credit conditions for mortgage lending remain about at tight as the days after Lehman.

  • I wonder if some buyers will simply get a jumbo mortgage and then pay it off after the rule expires.

  • LLCs are a legal mechanism that consumers are leveraging to their own advantage. That doesn’t mean it is primarily used as a vehicle for criminal intent.

This situation is all so so twisted. The optics are suddenly bad for consumers who don’t “borrow” to purchase a home.

More on Aspirational Pricing

Last week’s aspirational price theme continues to resonate with me so here are a few more examples of it.

  • The one that started it all – the aspirational pricing bubble – may be back on the market soon. The penthouse condo at 15 Central Park West purchased for $88 million back in 2012 for double what seller Sandy Weil of Citigroup bought it for a few years before. Weil set an arbitrary sales price (consistent with his tenure at Citigroup) and the immediate purchase by an oligarch validated it (although he was going through a bitter divorce, perhaps buying properties around the world to make the battle more complicated). It could be speculated that the $88 million sale was not a market transaction but more of a divorce strategy. It sold for 31% more per square foot than any other sale int he building including other penthouses! I believe this 2012 sale set off the aspirational pricing bubble (a bubble of a bubble). It has been proven true that this trophy market was not as deep and unending as was believed circa 2012-2014. There are other examples of aspirational pricing of units within the same building (15 Central Park West). I can’t wait to see how much the penthouse unit will be listed for.

  • The Mexican Billionaire Carlos Slim took his $80 million listing off the market. He bought it for $44 million in 2010. It still needs to be extensively renovated (Lenny Kravitz looked at it a while back). This pattern of pricing for double the purchase price shortly after a sale is a “classic” aspiration pricing pattern.

  • The infamous Playboy Mansion listed for $200M with a life estate for current owner/resident Hugh Hefner. Based on the lack of any activity of homes in this price range – and throw in the reportedly tired 80s interior and this home has been described as a tear down. The pricing looks to be a significant outlier in the current market. If the pricing isn’t extreme enough, the owner of Playboy magazine gets to live there for the rest of his life. I can imagine the scenario of the buyer’s family all sitting on the living room couch watching TV while an elderly man in a bathrobe descends the stairs to grab a snack in the kitchen. By the way, the home is near the former residence of Aaron Spelling that was purchased for $85 million a few years ago and is reportedly asking $150 million with some reported improvements. Classic aspirational pricing.

And speaking of aspirational, what about the Rupert Murdoch and Jerry Hall engagement?

Week 2 of Our 5 Week Market Report Gauntlet

Since I am in danger of going all TMZ/People Magazine on you, I thought I’d move on to a lot of newly released reports and data. We released 6 more market reports this week covering the end of 2015 for Douglas Elliman Real Estate. Next week there will be 5 more. The following week will see 9 more with 2 more to close out the festivities. The general pattern reflects the beginning of notable changes after 4-5 years with a similar narrative.

My favorite newly created phrase of the week was “Brooklyn Spillover” as a demand factor that had significant influence on the Queens market. A friend told me the phrase sounded like a description of oil oozing from the Exon Valdez. Of course we known that Brooklyn is now a global brand and oozing everywhere.

  • Manhattan, Brooklyn & Queens Rentals (December 2015)

    • MANHATTAN Manhattan rental price indicators continued to rise, although the rate of growth cooled since the summer on a year over year basis. Median rental price increased 3.1% to $3,350 from the same period a year ago, rising for the 22nd consecutive month. Average rental price increased 4.8% to $4,149 to the highest level in nearly six years…

queens12-2015rentalmatrix

    • BROOKLYN Brooklyn rental price gains have slowed since the summer months with most of the weakness seen in larger apartments. Median rental price did not rise for the second straight month after seven months of consecutive year-over-year gains. Median rental price was unchanged at $2,899 from the year ago quarter…

brooklyn12-2015rentalmatrix

    • QUEENS Rental price trends in northwest Queens remained volatile as all rental price indicators fell short of year ago levels. Median rental price declined 10.1% to $2,551 from the same period a year ago. Average rental price was $2,644, down 12.3% over the same period…

manhattan12-2015rentalmatrix

  • Brooklyn Sales (4Q-2015) The Brooklyn housing market continued to move at a rapid pace. All Brooklyn price indicators rose above their year ago levels to the second highest in history, but falling short of the record set in the prior quarter. Median sales price increased 11.1% to $650,000, the second highest level in history after the $676,250 record set in the prior quarter. This was the thirteenth consecutive yearover- year quarterly increase. Median sales price for the year 2015 was also $650,000, up 14% from the year 2014…

brooklynsaleschart4Q-2015

  • Queens Sales (4Q-2015) The Queens housing market continued to see rising prices and a fast moving pace. Average sales price fell a nominal $6 to $522,372 from the prior quarter record but was 6.1% higher than a year ago. Median sales price increased 9.2% to $470,000 from the year ago quarter but remained 2.1% below the record set in the third quarter of 2007. Median sales price has risen sharply from the corresponding year ago quarter over the past 18 months…

queenssaleschart4Q-2015

  • Northwest Queens Sales (4Q-2015) – a new sub market report. Overall sales activity in the northwest region of Queens surged from the year ago quarter. There were 232 sales, up 45.9% from the year ago quarter with all four neighborhoods – Long Island City, Astoria, Sunnyside and Woodside – seeing large gains…

nwqueenssaleschart4Q-2015

  • Westchester Sales (4Q-2015) Heavy residential sales volume continued in the Westchester property market through the last quarter of 2015. Strong economic conditions in the region as well as declining affordability in New York City are key drivers of demand. The number of sales, including single family, condo, co-op and multi-family properties, set a new 34-year fourth quarter record, after reaching an all quarter record in the prior quarter…

wcsaleschart4Q-2015

  • Putnam & Dutchess Sales (4Q-2015)

    • PUTNAM Putnam county sales activity rose sharply from year ago levels as supply slipped. There were 299 sales in the final quarter of 2015, up 13.3% from the year ago quarter. Listing inventory declined 2% to 701 over the same period. The combination of rising sales and falling inventory resulted in a faster market pace…

putnamchart4q-2015

    • DUTCHESS Housing price indicators for Dutchess county continued to show weak results. Median sales price for the county slipped 1% to $266,500 from the year ago quarter. Average sales price declined 7.5% to $288,339 and average price per square foot declined 2.1% to $138 respectively, over the same period. However the weakness in price indicators was largely reflected in the condo market while the single family market showed stability…

dutchesschart4q-2015

Ask An Appraiser

Jhoanna Robledo wrote a great article for New York Magazine that was chock full of artwork and had the best headline of the week: Living Above a Business (When the downstairs neighbors are chickens or strippers.) I answered a bunch of questions extracted from our appraisal firm’s experience in the field.

living-above-magnolia-bakery

If you’re wondering what it would be like to live above strippers or chickens, or housing market insights that don’t include mainstream numbers (particularly on Friday afternoons), sign up for my Housing Note here. And be sure to share with a friend or colleague. They’ll feel rich, you’ll feel musically inclined and I’ll be play the odds.

See you next week.

Jonathan Miller, CRP, CRE
President/CEO
Miller Samuel Inc.
Real Estate Appraisers & Consultants

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