Speculation and the Real Estate Market Bubble

[14 of spades]

No editorial here by me - but the following article outlines characteristics of the current speculation-driven bubble market in real estate. Characteristics of this bubble are, arguably, present in other speculation-driven markets as well. At the very least, an interesting read for it's economic theory.

 

The Link

 

The king of real estate's cashing out - Tom Barrack is selling most of his U.S. portfolio. Maybe you should be nervous too.

October 22, 2005: 9:50 AM EDT

By Shawn Tully, Fortune Senior Writer

 

NEW YORK (Fortune) - Tom Barrack, arguably the world's greatest real estate investor, is methodically selling off his U.S. real estate holdings as prices drive the market to nosebleed levels.

 

He likens the current real estate market to a game of polo.

 

"I feel totally safe playing polo on a field full of pros," says the bronzed 58-year old. "But when amateurs are all over the field, someone can get killed. They have more guts than brains. They charge after every ball and don't know when to hold back."

 

It's the same with U.S. real estate right now. "There's too much money chasing too few good deals, with too much debt and too few brains." The amateurs are going to get trampled, he explains, taking seasoned horsemen, who should get off the turf, down with them.

 

Says Barrack: "That's why I'm getting out."

 

Investors take heed. Barrack may be an amateur at polo, but when it comes to judging markets, he's the ultimate pro.

 

Arguably the best real estate investor on the planet, he runs a $245 billion portfolio of trophy assets, from the Raffles hotel chain in Asia to the Aga Khan's former resort in Sardinia to Resorts International, the largest private gaming company in the U.S.

 

Barrack's Colony Capital, one of the largest private equity firms devoted solely to real estate, has racked up returns of 21 percent annually since 1990, handing investors, chiefly pension funds and college endowments, 17 percent after all fees.

 

Barrack bought the Fukuoka Dome, Japan's Yankee Stadium, in part because he calculated that the titanium in retractable roof was worth as much as the purchase price.

 

His strategy is to buy classy but neglected properties anywhere in the world where prices are low. Then, he'll pour in capital to fix them up, and resell in them in five years of so with their pedigrees fully restored. Says his friend Donald Trump: "Tom has an amazing vision of the future, an ability to see what's going to happen that no one else can match."

 

Right now, Barrack's view of the U.S. market couldn't be clearer: It's a great time to sell, and a terrible time to buy.

 

In fact, he sees signs of the tech bubble mentality in real estate. Too much capital is chasing real estate, he explains, with hedge funds, private equity groups, and rich investors all bidding on the same properties. "They've driven prices to the point where the yields on high-quality properties are like the returns on bonds, around 5 percent or 6 percent," says Barrack. "That's too low."

 

And he sees the bubble deflating soon. Barrack thinks the catalyst will be a trend few others are talking about, a steep rise in the price of building materials and labor. "Construction costs have spiked 20 percent in the past nine months," he says. The reasons: Shortages of labor and materials like lumber because of the building boom, and increases in the price of oil, needed to produce everything from plastic piping to insulation to shingles.

 

The slump will show up first in speculative hot spots like Miami and Las Vegas, he says, where condo developers are preselling their projects for what looks like big profits. When they actually build the units over the next year or two, he predicts, they will end up spending more then the units are now selling for.

 

At that point, says Barrack, the developers will try to raise prices. "But most of these buyers are speculators," he says. "They will either sue the developers to get the original price or take their deposits back and walk away." The developers will then put the units back on the market, and the glut of vacant condos will drive prices down. "It's the busted deals caused by construction costs that will cause the turn in the market," he says.

 

So Barrack is buying just one type of property in the U.S.: Casinos. And in contrast to most gaming titans, he's doing it on the cheap.

 

Colony paid just $280 million for the 3000 room Las Vegas Hilton in 2003, one-tenth of what Steve Wynn paid to build his new casino, which has roughly the same number of rooms.

 

The reason Barrack likes casinos is that he's licensed to operate casinos in all the major markets, while most other private equity firms and other financial players don't have licenses. Hence, they're locked out of the market, and can't bid against Barrack. For Barrack, casinos are a safe, exclusive preserve, far from the frenzied melee that's makes every other part of U.S. real estate such a dangerous place to play.

 

For now, Barrack is getting off the field. But when the din subsides, and the amateurs depart, look for Barrack to ride back in, mallet cocked, ready to play again.

[joe_collector]

Great article.

[Aman619]

wow. I better cancel that new order of condo mylars I made last week!!!

[the blob]

in markets where the price increases are due to flipping, he has a very good point. prices in miami and las vegas are due to lots of speculation. it's frigging nuts what's been going on down there. of course, a lot of it still seems cheap from my manhattan perspective, but there just aren't enough six figure jobs down there right now to support mortgage payments on seven figure homes.

 

interesting article i read the other day discussed how flipping is not a factor in my hometown market in NYC. something like less than 5% of properties being sold are by people who lived in them less than 18 months before. prices have cooled off a bit here in the last 1-2 months already, not a crash, just a little bit more realistic, which I'm hoping means a smooth landing.

 

so, in comics, it will depend on how many of those slabs are being bought to flip next month vs. how many are going into the long-term collections.

 

what i don't understand is why a guy like this announces he's unloading and announces a crash is coming while he still has a few hundred billion in assets he wants to sell. he's hurting the value of his portfolio. of course, he may have his own reasons for wanting prices to plummet: like hoping he can pick up some cheap properties in the process.

 

i suspect that in 5 years he'll own more real estate than he does now.

[Aman619]

in markets where the price increases are due to flipping, he has a very good point. prices in miami and las vegas are due to lots of speculation. it's frigging nuts what's been going on down there. of course, a lot of it still seems cheap from my manhattan perspective, but there just aren't enough six figure jobs down there right now to support mortgage payments on seven figure homes.

 

interesting article i read the other day discussed how flipping is not a factor in my hometown market in NYC. something like less than 5% of properties being sold are by people who lived in them less than 18 months before. prices have cooled off a bit here in the last 1-2 months already, not a crash, just a little bit more realistic, which I'm hoping means a smooth landing.

 

so, in comics, it will depend on how many of those slabs are being bought to flip next month vs. how many are going into the long-term collections.

 

what i don't understand is why a guy like this announces he's unloading and announces a crash is coming while he still has a few hundred billion in assets he wants to sell. he's hurting the value of his portfolio. of course, he may have his own reasons for wanting prices to plummet: like hoping he can pick up some cheap properties in the process.

 

i suspect that in 5 years he'll own more real estate than he does now.

 

you have to question the timing and source of ALL such articles. FORTUNE is a respectable magazine. But, articles get put together and written in ways that when learned, just dont seem to be in the same vein as the way they are read once they see print. I mean the sources have agendas, the choices of subjects chosen, and the timing too.

 

Having said that, I dont know enough to parse what is really being said. However, his analysis of the potential catalysts of the coming RE bust in those markets due to increased costs sounds pretty believable!

 

As for NYC, gee, I always marvel at just how much facking money is around!! An awful lot of people now have an awful lot of dough!! And NYC being one of the top 5 cities in the world (?) has always attracted a LOT of that money for a long time now. Until BYC ceases to be the place to be, real estate will be fine, given ups and downs here and there.

[joe_collector]

of course, he may have his own reasons for wanting prices to plummet: like hoping he can pick up some cheap properties in the process.

 

When I read this kind of blather, I get a headache. It's like for ANYONE to say anything negative, they must have a "secret agenda" and are trying to drive prices low, then planning to scoop them up cheap.

 

Far more likely, this guy has probably sold off all he wants to now, taken it offshore, and is trying to bolster his image by predicting a very obvious crash in US real estate values.

[the blob]

Sir, you apparently do not read the New York Times, where every other article seems to be about the impending crash. It gets me feeling like NYT writers, most of whom don't make enough to buy an apartment here, are writing these articles in the hope that they depress prices for them to be able to buy something. Almost to the point where they really distort things.

 

If he has, in fact, sold off what he wants to (and maybe he has, i have no idea what his portfolio is in), then why shouldn't he badmouth the market? Help fuel the hysteria, push those prices down a bit, and come back strong in a couple of years when the types of properties he likes to chase have dropped 30-40%?

 

Like when I've sold all my comics....

[joe_collector]

If he has, in fact, sold off what he wants to (and maybe he has, i have no idea what his portfolio is in), then why shouldn't he badmouth the market? Help fuel the hysteria, push those prices down a bit, and come back strong in a couple of years when the types of properties he likes to chase have dropped 30-40%?

 

But this will happen with or without him saying so.

 

That's why I feel it's more a case of ego and wanting to bolster his "analysis skills" in the public eye. After all, when you're that rich, power and prestige mean a lot more than dollars and cents.

[whetteon]

If he has, in fact, sold off what he wants to (and maybe he has, i have no idea what his portfolio is in), then why shouldn't he badmouth the market? Help fuel the hysteria, push those prices down a bit, and come back strong in a couple of years when the types of properties he likes to chase have dropped 30-40%?

 

But this will happen with or without him saying so.

 

That's why I feel it's more a case of ego and wanting to bolster his "analysis skills" in the public eye. After all, when you're that rich, power and prestige mean a lot more than dollars and cents.

 

I agree with Joe. At this point he's already gotten in and out. He's made his money. The only thing left for him to do is wait for the market to crash and scoop up the deals. Sitting on 245 billion dollars I suspect he's not in any hurry and could care less if the market goes strong for another two or three years before the eventually bust.

[nearmint]

There's certainly a feeling in CA that the bubble is about to burst. Our house was just appraised at 4 times what we paid for it only 9 years ago.

 

I can't imagine very many young couples can afford anything in the current market.

[joe_collector]

Sir, you apparently do not read the New York Times, where every other article seems to be about the impending crash. It gets me feeling like NYT writers, most of whom don't make enough to buy an apartment here, are writing these articles in the hope that they depress prices for them to be able to buy something.

 

In my experience, the "secret motives" conspiracy crowd are those with the most financial stake in a positive outcome, so much so that they feel anyone with something negative to say is looking to depress values for their own nefarious goals.

 

I've seen this more times than I can count, and all of the largest investment scandals in history had a large pocket of people who refused to see the truth and kept up with this "they're badmouthing to lower values and scoop up deals" hogwash, even as the reporters and analysts were proven correct, and the investment became worthless.

 

I even see this bizarre mindset on EBay, as you try and warn a potential bidder of a scam auction, and he emails back accusing you of being some kind of rip-off artist looking to buy these "valuable comics" yourself.

[uclapeterg]

There's certainly a feeling in CA that the bubble is about to burst. Our house was just appraised at 4 times what we paid for it only 9 years ago.

 

I can't imagine very many young couples can afford anything in the current market.

 

[Aman619]

like evrerybody else: get three jobs!

[joe_collector]

like evrerybody else: get three jobs!

 

... with one of them being Drug Dealer.

[Silver Surfer]

Well I don't think Vancouver will slow down too much, might dip slightly but with the Olympics in 4 years the market will keep on chugging. Besides if your going to live in a big Candian city, Vancouver is really the only choice.

[the blob]

Thing is, I've been reading about a real estate market crash in the pages of the Times since about September 12, 2001. Here we are 4 years later.... I'm just hoping for a soft landing, more realistic levels. I was here in the late 80s/early 90s too, I know these things can happen. But people write in to the NYT and say things like "I hope there's a spectacular crash so that I can afford to buy something," so yes, I really do believe a certain segment of the population is rooting for and pushing for a market crash, particularly when I read a "rentings vs. buying" article where the stated rental costs are about 10-20% less than what I actually see similar apartments renting for and the stated owning costs are about 10-20% more than I see them selling for. Yup, I smell an agenda from some 28 year old journalist who is still renting a studio apartment.

[joe_collector]

Besides if your going to live in a big Candian city, Vancouver is really the only choice.

 

Here's Surfer's father with an empassioned plea to his future wife (and Surf's mother):

 

 

And a quick pic of the Silver one on his daily constitutional:

 

[Silver Surfer]

I wish I had my "Leaf Blower" pic handy.

[14 of spades]

Besides if your going to live in a big Candian city, Vancouver is really the only choice.

 

That's a bit of an odd statement...

 

Toronto?

Montreal?

Calgary?

Halifax?

Edmonton?

Ottawa?

 

what's your reason for saying that?

[shadroch]

Besides if your going to live in a big Candian city, Vancouver is really the only choice.

 

That's a bit of an odd statement...

 

Toronto?

Montreal?

Calgary?

Halifax?

Edmonton?

Ottawa?

 

what's your reason for saying that?

 

I suspect you've never been to Halifax or Ottawa.

 

The comment on this guy buying the LV Hilton for 1/10t the price wynn paid for his new place is just stupid.

One is a rundown business hotel and the other is the new standard worldwide in casinos,as well as having enough property for another five hotels.Its like saying someone got a great deal buying a 88 Olds rather than a 2005 caddy,since they both seat four people.