April 14, 2017

Victims Of The Greater Fool Theory In An Illiquid Market

It’s Friday desk clearing time for this blogger. “Last week, Lynn Courtney’s struggle to find a new place to call home finally came to an end when she bought a 1,300-square-foot home near Arlington High School. But she only got to call it hers after agreeing to pay $141,000 — $11,000 more than the asking price. According to the most recent appraisal, the market value of the home is $117,108. Two years ago, its market value was only $58,800, making that a 100 percent increase, according to Tarrant Appraisal District records. ‘I found that you couldn’t hesitate. If you found a house that was close to what you wanted, you had jump on it or it would be gone. … And I think most of it was overpriced,’ Courtney said.”

“In 2011, roughly 74 percent of the sales in Fort Worth were for homes valued under $200,000. But five years later, about 52 percent were under that amount and the number of sales in that category were declining, said Jim Gaines, chief economist at the Texas A&M Real Estate Center. ‘I don’t think it’s a bubble unless the whole economy collapses for some unknown reason,’ Gaines said. ‘The housing market is reacting as it should. There is high demand and low supply. It is not reactive, excessive exuberance.’”

“Reports of a slowdown in the San Francisco housing market are greatly exaggerated, at least according to a new report from Paragon Real Estate. Paragon found that listings for ‘luxury’ homes—those priced over $3 million for single-families and over $1.85-million for condos—throughout the city were expiring and being removed from market without a sale at higher and higher rates. The figures were particularly striking for luxury condos, where 176 were removed from market without a sale in 2016, versus a low of 80 in 2012.”

“‘Generally speaking, the luxury market has cooled more than the more affordable segments, and the luxury condo market has cooled more than the luxury house market,’ summed up the report. ‘This is mostly due to the recent surge of new-construction luxury condos onto the market in the city.’”

“Ahwatukee may be on the verge of a 21st century kind of gold rush. Suddenly, high-end luxury homes – at least a half dozen with multimillion-dollar price tags – are hitting the market as the spring buying season peaks. Since 2000, only 17 homes in Ahwatukee have sold for more than $2 million – and most of those sales were before 2010. Only three deals worth more than $2 million have closed since 2011, according to Mike Orr, a former Arizona State University housing market analyst.”

“‘I would say that pricing for the luxury market is not very strong and has gone slightly backwards since summer of 2015. I am not convinced there is anything unusual going on in the Ahwatukee high-end market, when you look at closed sales, rather than owner aspirations,’ he added.”

“It looks like Larry Gagosian’s Faena House penthouse didn’t hold its value. The art dealer flipped the Miami Beach penthouse for $12 million, a loss of nearly $1 million since he closed on the unit about a year ago, property records show. Gagosian isn’t the first Faena House owner to flip his unit at a loss during the market slowdown. Earlier this year, New York real estate developer Joseph Moinian and his wife Nazee bought billionaire Leon Black’s condo at Faena House for $12.5 million, a 24 percent discount from Black’s purchase price of $16.5 million.”

“Abu Dhabi’s property market is starting to see sell-offs … and it’s not just by the developers alone. Investors who bought from off-plan launches in the last two years are putting these up for sale in greater numbers. Property owners are being forced to take drastic actions where they cannot make an exit at a decent price. ‘In some instances, such as those who purchased property on Reem Island, the inability to achieve desired sale prices is prompting vendors to enter the rental market to generate cash flows,’ the Cluttons report adds. ‘These ‘accidental’ landlords are competing for a limited pool of tenants and this is hampering the rental market’s ability to register any meaningful growth.’”

“I find it laughable when investment bankers come to my office and try to assure me that warehouse and logistics space in Dubai is a ‘defensive’ investment. Mathematical reality does not support this argument. Warehouses, like luxury homes, are a kiss of death when demand slumps as their market is so illiquid. As J.P. Morgan rightly observed ‘Liquidity is like a cab on a rainy night. It disappears when you need it the most.’ I was shocked to read that the prices of Burj Khalifa apartments had fallen by 25 per cent in the past year. Prices for Palm Jumeirah apartments, Emirates Hills and Hattan on the Lakes villas have all fallen by 20-25 per cent in the past two years.”

“As listed REIT’s on Nasdaq Dubai demonstrate, secondary market liquidity is simply impossible to attract when a leveraged distribution yield is below 5 per cent or less than the cash yield on a studio in International City! My call? Caveat emptor! Buyer beware as it is no fun to be a victim of the greater fool theory in an illiquid market.”

“While the total number of houses surpasses the number of Iranian households, millions of dollars are trapped in the form of empty residential units, the minister of roads and urban development said. ‘There are a total of 25.4 million houses and 21.5 million households in Iran, which shows that for the first time, the number of houses is more than the number of households,’ Abbas Akhoundi was also quoted as saying by ILNA. The country has some 2.58 million empty homes, 490,000 of which are in the capital Tehran.”

“‘These empty homes are worth $250 billion while all the companies currently listed on the stock market are worth $110 billion, meaning that we have twice the total worth of our equity market locked in empty homes,’ he added.”

“Terrence Boswell Inniss, President of the Trinidad Building and Loan Association says that people who invested in high end property to rent to expatriate workers are hurting. He said there was a time when property values were going ‘through the roof’ and people were renting houses for US$10,000 a month and they were getting those rates. ‘That market has practically dried up, as a result of which a lot of people have been left holding the bag,’ he said.”

“The under-par auction price of a foreclosed apartment at The Palace in Taipei, once the most expensive residential complex in Taiwan, was an isolated incident, not a sign of a crash in the nation’s luxury housing market, analysts said. The price translates to NT$1.88 million per ping, a 37 percent drop from the NT$2.98 million per ping recorded in July 2013. ‘The foreclosed price is not available on the regular market and therefore will not become a benchmark,’ Taiwan Realty vice chairman Jack Chou said, adding that it is not fair to compare good assets with bad ones that usually entail higher risk.”

“In the current property market across Australia’s mining towns it is difficult to comprehend a recent past where one had to buy a house because there were no rentals available. Emma Offler moved to Roxby Downs to be with her partner in 2010. They spent more than $500,000 on a house, and poured another $10,000 and a lot of effort in to renovations. A few years later, Ms Offler made the decision to move back to Adelaide to pursue a career, leaving their expensive home empty a lot of the time. She said her shift-worker partner lives in the house for the weeks he is working, but with so many houses vacant it is not worth renting out.”

“Ms Offler said their situation is not unique. ‘There are definitely plenty of people out there who are making huge losses on their properties in Roxby at the moment,’ she said. Ms Offler said the feeling of wanting to leave the town, but being tied down by owning a property, was a scary situation to be in. ‘I did feel quite trapped. I thought there’s no way we’re going to be able to afford to move from Roxby and I’m going to be stuck in a job I’m unhappy in. But I guess we made it happen because we had to.’”