Really, my house isn’t worth that much. (repost from 3.3.10)

City and state government workers were huge beneficiaries of the boom years, since not only did their houses appreciate by double digit rates, so did their salaries. Since taxes are based on home values, the bubble meant that government got just as bloated as the real estate market. Now that homes are worth less, it is in bureaucrats’ best interest not to admit it.

This story comes out of Nevada, but it could be anywhere.

“Case 804!”

Don came to the lectern and leaned into the microphone, a resolute, if rumpled, man with thick white hair, a Col. Sanders mustache and glasses.

“Before we came down here,” he told board members, whose faces were mostly hidden behind computers, “we drove around. There are 10 foreclosures within a mile of my house!”

Don mentioned the home that sold for $132,000. Board member Tio DiFederico, a commercial appraiser, had some questions: Was that a bank sale?

“Yes, sir.”

“OK, it probably wasn’t in very good shape.”

“Actually, I was in that house. It was in fairly decent shape.”

DiFederico wasn’t swayed. “We’ve discussed this before — these bank sales sell for about 25% less than owner-occupied homes. They need to get rid of them faster.” He suggested the Knights’ home was worth $140,000.

In the audience, Janet grimaced. Still too high.

“The problem with short sales and foreclosures is they always go submarket,” said board Chairman James Howard, in a somewhat conciliatory way. “And if you try to set your values based on those short sales and foreclosures, you’ll always be a little bit low.”

The Knights lost on a 4-to-1 vote. The house’s value was set at $140,000.

“I’m sorry we weren’t able to help you today, sir,” Howard said.

The story says the home in question could have fetched well over $300,000 at the peak.

Video presentation: Chanos on China’s state-sponsored bubble

Thanks to Pej for finding this:


Chanos relays a great quote from Milton Friedman: He was brought to watch the Chinese built a canal, and when he asked why they were using shovels and not bulldozers, he was told that machinery was being eschewed in order to create more jobs. Friedman replied with something like, “Oh, I thought you were building a canal. If it’s jobs you want, why don’t you give them spoons?”

Like the Chicago school that he founded, Friedman was great on most issues except for money. He couldn’t come to terms with the idea that the very existence of a central bank and legal tender laws create insurmountable moral hazard and will always lead to bubbles.

Ok, so how big is China’s commercial real estate bubble? Under construction right now, there are 25 square feet of office space for every person in China.

Family savings are being invested as down-payments for investments in highly-speculative developments. The bust will take care of a lot of the middle class’s much-touted savings.

At last, NYC rental and condo markets softening

Hat tip to Dima for this article in AM New York.

For this first time in a long time, rents are either holding steady or falling in Manhattan, signifying a broader weakness in the city’s rental market, observers said.

What’s more, many landlords throughout the city are getting creative (if not desperate), agreeing to pay broker’s fees, or giving away the first month’s rent free; sometimes free parking, a gym membership or moving expenses are thrown in.

“Last year at this time, there was no such thing as concessions like these,” said David Calderazzo, a broker with Chelsea-based Luxx Realty.

I can attest to that statement. My rent went up 10% a year for the 3 years I rented in Manhattan. The last hike was this past January (they let me sign for just 2 months that last time). They would always offer the option of a 2-year lease to lock in only a 15% hike, but I always went for the one-year, at first to leave my options open, and later because I thought that rents couldn’t possibly continue up at that pace.

Calderazzo found an apartment for roommates Nick Parisi and Greg Wagner. They had their broker’s fee paid for when they moved into a converted two-bedroom in The Chesapeake, a luxury building on the Upper East Side. Their rent? $3,300 a month.

For some perspective, here’s what reviewers have to say about their building. $3,300 for a 2BR in Manhattan sounds like a bargain, but it is on the edge of the wilderness, up on 94th Street by the East River, a long walk from the Subway. We were paying $3400 for a 1BR in central Midtown, but even this area is not so inviting in the wee hours.

The young professional demographic in NYC is being hit hard, as banks and law firms trim the fat. These industries are still morbidly obese from the credit binge, so I expect a lot of former structured finance and M&A hotshots to head back to the nest or consolidate living space. This is not a crowd with big savings, since taxes eat half of salaries and rent takes half the rest. Then there’s often student debt, and most of what’s left goes to enjoying NYC.

Figures from Citi Habitats show apartment prices largely steady compared to last summer. The Real Estate Group of New York found signs of declines in most categories, with two-bedrooms in non-doorman buildings dropping 5 percent to $3,968.

The NYC market is where the nationwide market was in 2006. Prices are sticky, but volume is drying up fast. The Sun reports that condo sales are down sharply:

As we approach the end of summer, the sales volume of New York City condominiums is way down, and it is harder than at any time in recent history for purchasers to qualify for residential mortgages, most developers and brokers say. Still, many are hopeful that the situation is merely a case of the summer doldrums, and that activity will pick up again in the fourth quarter of 2008.

“The indicator which sticks out most for condominium sales for 2008 is that the total number of transactions are down 21% in Manhattan and 26% from 2007,” a broker at Prudential Douglas Elliman, Christopher De Weaver, said. “The number of days on the market has blown out from 117 to 135, so it’s taking almost a month longer to sell fewer apartments which are inventory. Nevertheless, prices continue to hold up. But having said that, we are still selling at sales volume of 2006 in terms of number of transactions.”

Volume is down so much over last year because 2007 was such a blowout year for NYC, as everyone was flush with their record bonuses from ’06 and rightly expected a near-repeat in ’07. Stocks made higher highs, and deal mania was strong through the first half.

“We are selling less, and working longer with a product that hasn’t yet adjusted downward in price, while having to navigate a mortgage landscape that changes weekly and daily.”

The CEO of Coldwell Banker Hunt Kennedy, David Michonski, said, “Sales are down about 32% and open business, meaning contracts signed, is down about 40%. This means the closed sales figures will get worse.”

This guy sounds like he knows what’s coming:

“Sellers of condos in this market are coming to realize that sales are slow, and they are looking at the fall selling season as a litmus test of how much discounting they will have to do in 2009,” the president of the Troutbrook Company, Marc Freud, said.

Another broker tries to be upbeat:

“The summer makes it an unfair comparison. Let’s see what happens in September, but my gut tells me that if there is not stability in the stock market, and we continue to see the types of swings and lack of traction, people will be hesitant to pull the trigger unless they really have to.”

This is the key change, from investment mania bidding to regular living expense decisions:

This is a large shift in buyer mentality from several years ago, when potential buyers moved quickly because they feared that units would sell quickly and prices may go up.

In NYC as everywhere, credit is the culprit:

No longer can a purchaser obtain financing with as little as 5% or 10%. The bar today requires at least a 20% or 30% down payment and higher credit scores.

This reminds me of the bit in Sex and the City (circa 1999, pre-bubble) where Carrie needs to buy her apartment but doesn’t have the 30k down payment. “30 grand? Who has 30 grand?” Turns out she had 40k worth of shoes in her closet. One broker just doesn’t get that this is a big deal:

“With regard to getting a mortgage, it now takes longer and requires more paperwork. Yes, a purchaser is required to put 25% to 35% of the purchase price down. So what? So we are back to the way we did business for 30 years. It’s only a shock to those too young to remember,” he said.

So what? Well, 30 years ago Jim Rogers bought a townhouse for $10 a square foot, that’s what. He got a great deal in what was then a lousy part of town, but even Park Avenue footage could be had for $50 (about $150-200 in 2008 dollars). The good stuff is $2000 today. And household savings rates were over 10% in the ’70s. Savings have been zero to negative of late, though just last quarter they rose to a whopping 2.6% (a sign of deflationary tight-fistedness).

“On the positive side, there are plenty of buyers out there,” Mr. Michonski said. “Every week our agents tell us they have many buyers. The issue is they are not buying, but hoping to buy, or thinking of buying, or intending to buy. In other words, they lack an urgency to act. When they get that urgency, there will be a flood of buyers, as they are waiting in the wings. They all want a bargain, so unless you can convince them that something is a bargain, they don’t bite.”

The only thing that will make them bite is lower prices. Potential buyers see which way the wind is blowing, and are waiting for prices to come down. Once they start falling, they’ll feel even more incentive to wait, especially with softening rents. That is a key part of how deflation works – - a slower velocity of money. People are in no hurry to spend.

“The other good news is that bottom fishers are out in force. They are everywhere. There is no lack of confidence to buy on their part. They are relishing the prospect of buying and searching everywhere for bargains. It is not a market without buyers, a very critical distinction. Rather, it is a market full of buyers who want a bargain and can wait and are waiting. Thus, they waste a lot of time for brokers because they want to see everything and then more of everything, and they put in low-ball offers that require endless negotiations.”

Silly broker. Next year he’s going to be begging those same buyers to come back with thier “low-ball offers.” Those offers are the market, and the market is not moving up. Also, the jobs situation is still not that bad, with Wall Street layoffs so far only in the low-mid single digits, as opposed to 17% in the dot-com bust.

Finally, no discussion of NYC real estate would be complete without mention of those supposed saviors, the foreign buyers:

“The foreign buyers believe in our market and want to have a pied-à-terre or an investment property here. We also have new nationalities buying here now: Russians, Indians, Chinese.”

Yes, that’s all well and good, but how will they like getting their irises scanned and logging their trip itineraries with DHS? Our politicians and press are doing all they can to antagonise those very Chinese and Russians, for whom it is no easy thing to get just a tourist visa. And sure, NYC will retain its gritty charm, but so does Buenos Aires, a hopping market for foreign buyers after prices crashed 75% in their financial crisis. Did foreigners save that city? Only if you consider it salvation to pay under 100k for the beautiful pre-war pads of formerly middle class Portenos made desperate by banking and currency failures.

Pricing assets in gold

When thinking about the long term price fluctuations of various assets, I like to use gold as a yardstick. An ounce of gold is not a perfect store of value, always worth “a nice men’s suit” or so many barrels of oil or bushels of wheat, but I find it useful nonetheless, since it does act like money in some respects.

Gold had the most purchasing power in recent times in the 1970s, when inflation destroyed the real values of financial and real estate assets. In 1977 gold averaged about $150, which would buy you at least five square feet of nice Manhattan property (or 15 in the case of Jim Rogers’ UWS townhouse, although the quality of the neighborhood at the time can be seen in Charles Bronson’s Death Wish vigilante movies). Out in the cozy, low-crime suburb of Short Hills, a mid-range house with a big yard would set you back about 1,000 ounces. Using the bubble price of $800 per ounce in 1980, the house would cost about 200 ounces, and one ounce would buy 30-40 square feet of prime Manhattan floor space.

At the top of the ensuing 30 year asset bubble, an ounce would only get you half a square foot of Manhattan if you were lucky, and the Short Hills house would cost about 2,000 ounces.

As for stocks, in the mid to late 1970s the Dow ranged from 2 to 8 ounces. At the top of the bubble in 2000, it cost 40 ounces. Today it costs about 12, which is what it cost early in the analogous year of 1930.  I suspect it is headed back towards the low of 1 that was last seen in 1932 and 1980, if not the sub-ounce levels that were occasionally seen in the 1800s (in an ex post facto approximation of the index).

I also suspect that the rent on a prime 1 bedroom apartment in a city like Singapore, Hong Kong or Zurich will get down to 3 ounces per month or less, as in the 1930s in New York (click here for some adds for rentals from that era). New York 1 bedrooms have already gone from 9 to 4 ounces in about 5 years, and with the decimation of the finance industry and the return of street crime, I suspect they will be at sub-ounce levels again several years from now. New York in the 1930s still had a broad industrial base and relatively low crime (across the boroughs, not just swanky Manhattan), more akin to the other cities mentioned here than itself today.

It’s common practice in parts of Southeast Asia to price real estate in gold (often in taels, a measure equal to 37.5 grams or 1.2 troy ounces), and I suspect that as we enter a period of stress on paper currencies worldwide, more and more people will begin to think of the gold price for various assets.

Keep in mind that as the global asset bubble pops, the early stages should continue to be deflationary. People are going broke for a want of money to pay creditors and bills. The kind of money they are desperate for is whatever will make these headaches go away, and that is the fiat that rules in their country. The ensuing waterfall in asset prices should drag gold down along with everything else, but gold acts like money in deflation, so although it may fall 30-40% against the stronger currencies (Yen, CHF, Euros, dollars), if everything else falls 75-99%, its purchasing power will continue to increase, as it has against most stock and real estate markets since 2000, the true start of this secular bear market.