From the Boston Globe:
Housing market suffers downturn
The housing slump isn’t over yet after all.
After getting off to a strong start in 2007, home sales in Massachusetts fell 1.7 percent in April compared to the same period last year, and the median home price declined 2.3 percent, to $345,000, according to a monthly report issued yesterday by the Massachusetts Association of Realtors.
A second market report was more dire. The Boston real estate publishing firm Warren Group recorded a similar drop in the number of sales, but said prices declined 4.7 percent. Warren Group counts a larger number of transactions in its analysis, including sales by owners, than the realtors group, which tracks listings through brokers only.
Industry officials said the downturn is because of an oversupply of homes for sale and continued fallout from problems in subprime mortgage lending, where overstretched buyers of the past several years are trying to unload homes they can no longer afford.
April’s sluggish pace is bad news for home sellers and brokers, who were hoping that robust sales in January and February meant the deep downturn that began last year was at an end. For prospective buyers, however, the data suggest they wield the upper hand during the crucial spring selling season.
“This is like a retailer having a bad Christmas season,” said Babson College finance professor Richard Bliss. “It doesn’t matter what happens the rest of the year, [because] you’re never going to make up what you lost in the peak season.”
Record Hamptons Home at $103 Million Signals Market Resilience
By Kathleen M. Howley
May 23 (Bloomberg) — Ron Baron, founder of the investment company bearing his name, didn’t hesitate to pay $103 million for a 40-acre parcel in East Hampton, New York. It is the record for a residential property in the U.S. and just a little less than double the annual compensation of some of his neighbors.
House prices in the beach retreat that Steven Spielberg shares with billionaire investor Thomas H. Lee rose 14 percent during the first quarter, even as the national median fell. The Hamptons, former potato farms where seagull cries now mix with the sounds of well-tuned Ferraris, is boosted by salaries on Wall Street, 40 minutes away by helicopter, said Diane Saatchi, a broker at Corcoran Group in East Hampton.
“People have made an incredible amount of money on Wall Street over the last few years,” said Saatchi, who started selling real estate in the Hamptons 19 years ago. “For them, spending millions on a summer home to be near their friends isn’t a big deal.”
Wealthy New Yorkers trade their Manhattan apartments for summertime houses in the dozen hamlets of East Hampton and Southampton to maintain their social standing, said George Simpson, president of Suffolk Research Service Inc., a real estate records company based in Southampton.
“The housing market all over the United States is down, but not here because this is where all the rich people want to be seen in the summertime,” Simpson said.
The Hamptons began attracting crowds of Manhattan socialites and executives in the 1960s. Their demand pushed up property values of century-old estates built for wealthy industrialists such as Harry Payne Whitney and cottages where artists such as Jackson Pollock had summered.
Double Blankfein’s Salary
The record price Baron paid is about double the salary of elite Wall Street executives such as Goldman Sachs Group Inc. Chairman Lloyd Blankfein, a Southampton summer resident who earned $54 million in 2006 at the world’s largest securities firm by market value. In a typical U.S. home purchase, buyers spend almost four times their annual income for a property, according to data from the Chicago-based National Association of Realtors.
Incomes for Wall Street traders and investment bankers are surging as companies pay higher salaries to fight the lure of hedge funds, private pools of capital that give managers a cut of profits on the money they invest. Last year, the five biggest Wall Street firms paid a record $36 billion in bonuses.
The median price for East Hampton, where actress Renee Zellweger and billionaire financier Carl Icahn own vacation homes, rose to $970,000 in the first quarter from $850,000 a year ago, Simpson said. The total sales volume rose to $300 million from $216 million a year earlier.
Higher Prices, Fewer Sales
While prices are increasing, transactions have lagged behind. East Hampton, which includes the villages of Montauk, Amagansett and Wainscott, had 160 sales in the first quarter, down from 165 a year earlier and a record 221 homes in 2005.
In Southampton, where fund managers George Soros and Stanley Druckenmiller own homes, the median price was $795,000 in the first quarter, 6.7 percent higher than a year ago. The total sales volume fell to $545 million from $572 million, and the number of transactions declined to 337 from 391.
“There are some staggering numbers at the high end, but the market for houses in the $2 million to $3 million range is just chugging along,” said Paul Brennan, Hamptons regional manager of Prudential Douglas Elliman Real Estate. “Properties are selling, but I wouldn’t call it hot.”
Southampton includes the villages of Water Mill, where actor Richard Gere owns property, and Bridgehampton, site of the four-bedroom house that model Christie Brinkley put on the market this month for $7.9 million.
Prices Dwarf Nation
“Some of this year’s demand is being driven by Europeans, because of the weak dollar and strong euro,” said Susan Breitenbach, the Corcoran vice-president who lists Brinkley’s property. “To them, a home in the Hamptons seems like a bargain.”
Hamptons real estate prices dwarf those paid by most buyers in the U.S. The median selling price of previously owned homes across the nation was $212,300 in the first quarter, down 1.8 percent from a year earlier, according to the National Association of Realtors. That was the lowest in two years.
The U.S. median home price probably will fall 1 percent in 2007 from a year earlier, the realtors’ group said on May 8. That would be the first national decline since the Great Depression in the 1930s, said Lawrence Yun, an economist with the Chicago-based trade group.
The `M’ Word
For many U.S. buyers, stricter lending standards resulting from record defaults among subprime borrowers have made it tougher to purchase real estate. For most Hamptons buyers, it’s had no effect, said Judi Desiderio, president of Town & Country Real Estate in East Hampton.
That’s because three-quarters of Hamptons buyers don’t use mortgages, said Desiderio, who’s been selling real estate in the area for 26 years. Of those who borrow to buy real estate, about 10 percent do it from necessity and the others opt for a home loan because of temporary cash-flow issues, she said.
“If you’re buying a house over $5 million in the Hamptons, you don’t even know what the `M’ word means,” said Desiderio, referring to mortgages. “We don’t even bring it up, it would be an insult. They’re strictly all-cash deals.”
Richard Grasso, the former New York Stock Exchange chairman who’s fighting a court battle to hang on to his $190 million pay package, lives in the Southampton village of Sagaponack.
J. Crew Group Inc. Chief Executive Millard Drexler, known as Mickey, bought film director Paul Morrissey’s oceanfront estate in Montauk at the easternmost tip of Long Island. Drexler and his wife, Peggy, paid $27.5 million in January for the estate, the former home of artist Andy Warhol.
Antique Houses
Reed Krakoff, president of Coach Inc., paid $25 million a month ago for the East Hampton estate where a young Jacqueline Bouvier, who later married John F. Kennedy, spent her summers. The property has a six-bedroom house and formal gardens.
Baron, whose New York-based Baron Capital Inc. oversees $20 billion for clients, bought Adelaide de Menil’s East Hampton estate this month after the heiress to the Schlumberger Ltd. oil service fortune donated four antique houses and two barns from the property to the town. The buildings were moved in April from the 40-acre site of pine trees, fields and sand dunes. Baron declined to comment.
The price Baron paid surpasses the U.S. record set by Revlon Inc. Chairman Ronald O. Perelman who sold his Palm Beach estate for $70 million in 2004 to Dwight Schar, chairman and chief executive officer of homebuilder NVR Inc. Perelman owns a home in East Hampton.
`Three Ponds’
Baron’s price was more than double the former Hamptons record of $45 million for Burnt Point, the 25-room mansion on Georgica Pond that copper trader David Campbell sold in 2005 to Stewart Rahr, president and CEO of drug distributor Kinray Co.
The most expensive Hamptons home now on the market is Three Ponds, the 25,000-square-foot Mediterranean-style Bridgehampton mansion owned by Cheryl Gordon, the widow of Manhattan commercial real estate mogul Edward Gordon. The estate is listed for $75 million with Corcoran’s Breitenbach.
The Gordon estate has been on and off the market for six years at the same price, with no takers, at least in part because it’s not on the waterfront, said Brennan of Prudential. The 65-acre estate has a 75-foot swimming pool, three ponds stocked with trout, an orangery or greenhouse, and a Rees Jones- designed golf course.
“Some of the price tags on these Hamptons sales can seem extravagant to outsiders, but they’re really not if you consider the buyers probably have been getting $20 million in bonuses for the last few years,” said Corcoran’s Saatchi.
HSBC reports that people with more than $250,000 in household income, who constitute the top 1.5% of U.S. households, report facing many obstacles when it comes to saving. Indeed when HSBC asked what prevents them from saving more, the top answer was the need to pay everyday bills, with 34% of respondents of those who earn more than $250,000 concurring.
The savings rate in the United States dipped to zero in 2005 and has even fallen into negative territory, the first time since the Great Depression.
Financial advisers recommend that people keep three to six months or more of income in a savings account, depending on their financial circumstance. But when people don’t save, and overspend in addition, a precarious financial circumstance evolves where even the slightest snafu in expenses can send them into defaults and bankruptcy.
Over the past two years, default rates on debt payments and bankruptcy rates have soared. Most recently, mortgage foreclosures have skyrocketed.
New Today! Paulson Now Sees “Major Housing Correction”
http://www.paperdinero.com/BNN.aspx?id=194
Excerpt features Treasury Secretary Henry Paulson discussing his assessment of the housing decline and his outlook for the future. Paulson suggests that the US has experienced a “major” housing correction that was inevitable after years of historic gains. “That correction has now been significant, we think it is near the bottom, it will take a while to work its way through the system.” Unfortunately, Paulson only reiterates the same guidance he offered last year prior to the housing market taking another major leg down.
Originally aired on: 5/21/2007 on New Hour
Running Time: 1 minutes 29 seconds
Shiller: Mr. Worst-case scenario
Robert Shiller called the tech-stock crash just as the Nasdaq peaked. But he is also the expert on the real estate market. And where does he think it’s headed now? Uh-oh.
By Jason Zweig, Money Magazine senior writer/columnist
May 21 2007: 3:10 PM EDT
(Money Magaine) — Robert Shiller is worried about your home’s value, and that’s not good. A finance and economics professor at Yale, Shiller proved he could see a crash coming with his book “Irrational Exuberance,” which forecast the end of the 1990s stock bubble and hit bookstores in March 2000 – almost to the day the Nasdaq started to collapse.
Today, Shiller believes homes are roughly as overvalued as stocks were then and, once again, he’s worth listening to.
Robert Shiller
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A research company he co-founded, Case Shiller Weiss, created the definitive index of housing prices. A newer venture, MacroMarkets, designs ways to hedge against risks like falling home values.
In short, no one else knows the history – and perhaps the future – of U.S. real estate prices better. Shiller spoke recently with Money’s Jason Zweig.
Question: What caused the stock bubble, and why did it end as it did?
Answer: Some sociologists talk about collective consciousness. We humans evolved to be very closely linked, and our minds focus on the same ideas. Those [ideas] get reinforced because we hear them all the time.
Back in the late 1990s, you kept hearing that you had to stake your claim on the Internet or you’d miss out on the future. No one cared about the present. Then something happened around March 2000. There was an acceleration of public talk about doubts. You could no longer declare at a cocktail party that Internet stocks were going up. Such statements had become embarrassing – and just like that, word of mouth changed.
Embarrassment is a powerful emotion.
Question: Is that about to happen in real estate?
Answer: It doesn’t seem like we’re there quite yet. But this is the biggest boom in housing prices since, well, ever. Nothing seems to explain it, and nobody forecast it. It seems to me…wait a minute. Please don’t quote me as forecasting the markets.
Question: Okay. What you’re about to say is not a forecast.
Answer: Well, human thinking is built around stories, and the story that has sustained the housing boom is that homes are like stocks. Buy one anywhere and it’ll go up. It’s the easiest way to get rich.
Question: So how rich can you get on real estate?
Answer: From 1890 through 1990, the return on residential real estate was just about zero after inflation.
Question: Excuse me? That’s all? Hasn’t it been higher lately?
Answer: Since 1987 it’s been 6 percent [or about 3 percent a year after inflation].
Question: So real estate doesn’t go up roughly 10 percent a year?
Answer: It can’t be true that homes rise 10 percent a year. If they did, in the long run no one would be able to afford a house.
Question: Let me grab a calculator. If real estate really rose 10 percent a year, a $25,000 home in 1957 should be worth roughly $3 million now.
Answer: And that flies in the face of common sense. In fact, I’m inclined to think there’s a good chance that the return on real estate will be negative, substantially negative, over the next 10 years because all booms reverse in the end.
Question: All right. We won’t call that a forecast either. So how should people think about their home as an asset?
Answer: Avoid concentration of risks. You need a house, but I would avoid a second one – or at least avoid an outsize house. Over-investing in real estate now would be a recipe for disaster.
Question: You also write about the risk to human capital. What’s that?
Answer: What you’re trying to do is to invest in skills that somebody else will want to pay you for. Let’s say you want to work at Bethlehem Steel. That would have been a good idea in the 1950s, not so good by the 1970s. The world went the wrong way on you.
Question: How can you manage that risk?
Answer: I used to coach children’s soccer, and I would tell my players, “Stand away from the pack, and sooner or later the ball will come to you.”
In your career choices too: Get away from the pack. Also, you associate your home country with safety. But the rest of the world is pretty peaceful too, on average, and the average is all that matters.
I think relatively few [Americans] are getting away from the pack, investing more outside the U.S. than in.
Question: How are you investing now?
Answer: I’m probably a little over 60 percent in stocks, almost all of it outside the U.S. I have a lot of cash. And I’ve been reducing my exposure to real estate. It may be at the end of a cycle.