Tuesday, February 01, 2011

Just When You Thought It Was Safe

Economics is extremely useful as a form of employment for economists.
-- John Kenneth Galbraith (1908 - 2006)

With all of the conflicting reports about real estate and the housing market, perhaps a little perspective is in order.
In Manhattan, rents have settled and are trending higher. There are some great deals in the Battery Park/Wall Street area. Things are still a little desperate there but $2000 for a studio/one bedroom (depending upon how much sleeping space you need) is sort of the bottom rung. Sales are moving along in Manhattan but even formerly hot properties are still only lukewarm. Old line brokers like Robert Agee at Quattrone are doing fine. Upstarts have had to trade in their new Mercedes.

The story in the Hamptons is a little murkier. Since East End brokers tend to start telling the truth about business 3 or 4 quarters after reality is painfully obvious, it is safe to say that sales are very slow, prices are off by 30 to 50 percent (from 2006) – depending upon which Hampton and how exclusive the location is – and certain price ranges do not move at all.
From those brokers who will talk, we’ve learned that properties in the $300,000 to $500,000 price range are moving (Hampton Bays) and there are mortgages available. Properties sales in the $500,000 to $1 million range (Southampton) begin to get very dicey. And, from $1 million to $3 million sales (East Hampton) only occur when the original price has been discounted by at least 30%. Above the $3 million to $4 million range (Water Mill/East Hampton/Southampton Dune Road), sales begin to pick up – since that is generally the all cash purchase territory of celebrities and hedge fund buyers. Above and beyond that range it is all Goldman Sachs types using taxpayer’s money to fund their lifestyle, compliments of the Federal government (East Hampton Dune Road/Quogue Dune Road). Those have lots of hedges and front on the ocean for safety.
In Westhampton Beach Village, the Performing Arts Center showed Inside Job for one day last weekend. In that Village, the government is partially asleep and numerous commercial establishments are shuttered and out of business. Since East End media has no “voice of opposition,” there is little to learn about the workings of each of the monolithic governments in power or its sycophants. Occasionally, a local blogger will spew forth half-truths and venom but mostly independent writers toe the party line or are shut down by local law enforcement. Freedom of Expression or Freedom of the Press gets in the way of politics on the East End and therefore accurate business news is almost as difficult to report as politics or corruption. Perhaps Michael Moore will pay a visit soon.

Commercial real estate continues to drop along with residential property values in the Hamptons (Richard Silver at Norma Reynolds in Westhampton Beach is reliable) and the trend will continue as New York City and New York State continues to attempt to find money. No one knows, yet, what affect the reduced number of real estate transactions has had on the Town of Southampton – and whether the Preservation Fund or its general coffers will affect civil service jobs. Default on interest payments and possible Chapter 9 bankruptcy has not yet been broached by Anna Throne-Holst or the Town Board but is a subject on every political leader in every one of the hundreds of municipal governments across America. Perhaps Goldman, Bank of America or Countrywide executives who might buy the newest mansion in the Hamptons might offer the Town advice on how to move the debt and risk “off balance sheet” as they did with Greece. A reader writes:

“Goldman Sachs has admitted that it is under investigation for helping Greece to hide its vast debts.
The controversial Wall Street bank - nicknamed the Vampire Squid because its tentacles stretch far and wide - is accused of having profiteered out of a complex currency deal that helped Greece massage its finances.
The Wall Street giant is claimed to have received as much as £192m in fees by entering a complex currency transaction in 2001 that helped Athens borrow cash without putting it on the books as a loan.
Goldman Sachs was once seen as the invincible bank that could beat other firms hands down. It has always paid vast sums of cash to its employees, so it can employ the hottest talent in the financial world.
America's Securities and Exchange Commission accuses Goldman of misleading its own clients and encouraging them to invest in a product that was destined to fail.
The lawsuit centers on trades set up by its sub-prime mortgage trader Fabrice Tourre, who has since been placed on 'administrative leave'.”

In general, the housing market has a very strong effect upon the health of the economy. And, the prognosis is the it will take close to six years before real estate can normalize.
There is a temporary lull in foreclosures as the banks dig out from under their own fraudulent behavior and there are some 11 million people whose properties are worth less than their mortgage.
A tsunami of foreclosures will resume some time this year or next and this will depress prices and add to the unemployment numbers. We are at the precipice of a “double-dip” recession which, for many, will just be a continuation of what has not seemed at all like the end of the last one.