The “Safe Deposit Box with a view” Effect is likely to continue……

The August 8, 2016 Barron’s financial weekly had some interesting commentary and analysis about the declining state of the upper end real estate market. The trigger for this was a surprisingly weak earning report from mega-glomerate Realogy Holdings, the umbrella company for traditional real estate firms focused on the high end market(The Corcoran Group; Sotheby’s; Coldwell Banker; Citi Habitats, and others).

The Realogy press release cited a slowdown in the high end market for this decline, and Barron’s attempted to link its usual financial market analysis to the world of real estate. This is a misfire that has plagued The Street for decades, as the real estate market often does not follow the traditional Wall Street models which they use to determine asset values in other classes.

Really actually tried to pin much of their decline on stock market weakness early in 2016. Any weakness was minor, and has since given way to virtually every U.S. stock index surging into new highs almost daily. I have no doubts that the Hamptons market may soon retreat from la-la land, and some areas of coastal Florida and California may follow. But this has little, if anything to do with a stronger dollar or traditional financial guru relationships they like to connect with the real estate world.

So let’s have some straight talk on the upper end real estate markets in summer, 2016:

  • American prime real estate as a store of value for the uber-rich attempting to find a safe haven for excess capital is alive, well, and likely to continue for many years, maybe for our lifetime. These people are not concerned with any sort of traditional measures of return on capital; they are concerned with safety of their money, and where else in the world can anyone park immense sums of capital without fear of it being in jeopardy of any future Government expropriation? U.S. real estate represents a source of stability, and a means of stashing capital while owning a place to live, or visit, in luxury and style. If the dollar rises to make such a purchase even more expensive for many, the buyers in this category will buy anyway.
  • The traditional exurban, or gated community suburban, neighborhoods are the ones most likely to get hit by a down market. However, this is as much to do with people’s changing life styles as it does any economic downturns. In our local, a common “trade” is to get out of Great Falls, or similar communities with multi-acre  estates, and into luxury condos or smaller luxury town homes in a more urban environment. This is going to continue, putting added pressure on the traditional real estate representatives of wealth and power (the large estate), and generating massive construction and demand for upper-end condos with a view, or luxury town homes in great locations.
  • The price sensitivity of many markets and styles of homes will, of course, be impacted by economic conditions. But the phenomena of foreign buyers seeking the highest quality urban and coastal homes is very much alive, and will continue. In fact, as economic conditions become more dicey in many parts of the world, the uber-rich will be more likely to want to park capital in prime U.S. real estate.

So while Realogy’s earnings may drop, and many of the traditional upper end markets they service may be subject to declining sales, that segment identified by Barron’s as likely to be negatively affected with it (the cash buying foreign investor/safety seeker) is in no way in danger of any sort of slowdown or collapse, as long as U.S. and international laws remain as is. But rather than unfolding a blanket of excuses over a lower earnings report and gaining a nod from Wall Street, perhaps Realogy is more negatively impacted by a different set of real life circumstances: the move in real estate sales away from bureaucratic, large firms as the primary “brokers to the wealthy”; the difficulty in coordinating the many different brokerages they have acquired into a synergetic model; a focus on the many traditional higher-end areas which ARE impacted by changing life styles, economic events, and a growing competition from more nimble entrepreneurial players; and the reality that although the stealth market of uber-wealthy foreign buyers will stay strong, there are not enough of them to overcome the other categories. But that is a different issue for a different day.

The point of this article is this: The uber-wealthy foreign buyers seeking quality, and specific types, of U.S. real estate as a “safe deposit box with a view” will continue to grow. Marginal changes in Fed policy, the dollar, the stock markets, and the like, will have virtually no impact on this growing movement.

Ray Wedell, CFA

Samson Properties




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