Buyer's Angst

I have just returned from a continental shopping trip. Not your ordinary walk on the high-street, but a cross between a serendipitous search and actual more imminent need for some family-oriented bricks and mortar. Some skeptics (hi Charles!) will undoubtedly be rubbing their eyes at the thought and timing of this potential pecadillo. And this has not been lost on this writer, though in my defense I will suggest it is more opportune than the denoument of 24 months passed. But what was most fascinating about my recent sojourn was the first-hand peak into the market of discretionary and forced sellers by a real discretionary buyer (who importantly has a macro view).

I was looking in two specific regions of this nation – one characterized by a gentle climate with second homes purchased by numerous non-local primary lifestyle transplants that are peripheral to essentially agricultural countryside, though still proximity to transport and several conurbations. The other - a decidedly wealthy area, with an enviable proximity to diversified commerce, natural beauty, as well as a financial centre.

Many agents (along with their customers), however, are behind the proverbial curve, or at the very least are putting on the bravest of faces. They simply do not get it. Or rather IT. They are in denial, clinging to the belief it’s a financial sector phenomena or, at worst, a recession like the others without making the connection between what such a recession might do do to prices given the 150% increase in the values of certain properties in these grographical markets during the preceeding 5 years, on top of an approximate doubling during the 6 years before that, which assumes optimistically that the blood-letting in 88-93 was sufficient to purge the massive Reagan-induced credit growth. The compounded effect (up ‘til recently) has been eye-watering to the man-in-the-street who doesn’t own, or who has stretched to own and a meaningful deterrent to this observer’s prior entry to the ranks of landed gentry – not out of ability, but purely out of an offense to my sensibility of value. The Chelsky basement studio of miniscule sq.mt.was NEVER “worth” GBP500,000 (let alone USD$1,000,000+ with the currency effect). Nor 400,000. Probably not even 300,000. Certainly not at exchange rates prevailing then, and probably not even now. That neither stopped people from bidding them up and trading them at those prices. The waterfront, the slope-side, the cliff-perched with the rare view, yes these of course do have rarity value. And when The People are flush, and lenders munificent, there is no telling what The Determined will pay, or, for that matter what is the correct price. This is precisely why momentum trading and trend-following strategies have great efficacy in long-toothed cycles. But without the fortuitous ability to go short, they would likely be pink elephants.

Historically, high-end real estate was property’s NASDAQ to median residential’s Blue Chip Dow, sporting higher betas. But fascinatingly, this time, until recently at least, there was a bizarre consensus that IT was a sub-prime problem, and not an economic one. IT affected the little guy. High-end jobs, and the winner-take-all economy would persist as jollily as before. Greenwich, Chelsea property, and prime secondary home values were safe. And while sub-prime markets indeed collapsed, NY and London prime vedically-levitated as if unaffected albeit with a dramatic fall in turnover giving pause for – if nothing else – hope that two decades of growing income inequality and flush emerging-market buyers would underpin both demand and prices. No one of course seemingly remembered the prime directive of forecasting, which is the aged-old-saw “Shit Happens”.

Fast-forward to late 2008 where asset prices have collapsed – be they equities (developed or emerging); commodities (except gold which is a mere 20% below highs) which are 50% off peaks; credit-risk (can spreads widen any further?); commercial real-estate (please look at S15REAL Equity or British Land chart) while shit-boxes in Florida, Vegas, CA and Arizona reportedly 40 or 50% of peak too. Yet the top-end remains in denial. Or alternatively, they have not yet been forced to sell their homes as others (even the best hedge fund managers with double-digit positive returns) have demonstrably been forced to liquidate their stocks, real estate, or commodity portfolios. There is clearly a lag, but sure as tides greatly rise and fall in Newfiendland, so too will the top end follow the path cut by other core asset prices, in similar if not greater magnitudes.

Instead what I heard from agents in the upper-end of a particular ”Prime” market was distinctly apologetic drivel such as:

It’s a micro-market...
It’s different this time…
Prices will not fall – they will just plateau and stabilize...
But it’s a very desired place…
Supply is so limited...
Enquiries have actually increased…
Our website traffic has been increasing…
People must have a place to live…
The Russians are coming…
When the new road [building, airport, blah blah] opens, a flood of buyers will enter…

They are counseling their clients NOT to panic. And to the sellers’ umm errr credit, they are heeding the advice…so far. “He is firm in his price”. No, she will not negotiate. “His cost is 2.5, and he’ll countenance a small loss, but no more”. Oh if I could only dictate to the trading gods the size of the loss I will countenance!! The emerging story is: “It was offered at 2.4mm and he turned down a bid at 2mm, and now its 1.8 offered, and there are no bids”. The more honest amongst the agents speak frankly at a time in which their allegiance to the seller is tenuous at best for they want to simply do a transaction, offering up bona-fide anecdotes like: “the family was squabbling about price. It was offered at 1.2mm a year ago (which was too high), and is now offered at 750k with no bidders. It will probably trade at 500k, when it does, and the buyer will have a “stolen” it. I liked that agent as she was the most honest of the lot, apart from being the most competent.

Other regions have out of necessity become more realistic. Dordogne has been flooded with distressed English sales, liquidating to stop the haemorrhaging in their primary residences, household budgets, to pay school fees, etc. The writing is on the wall. “Make an offer”, “looking for a quick-sale”, oh the sheet says EUR 1mm, but the actual offer price is 800k. Yes that’s 20% off admittedly elevated values before negotiation and a bid is countenanced. Country Life had not many more than a dozen props advertised in their mag this week, down from the three or four dozen not two months ago. Perhaps it is the time of year, but it’s more likely discretionary advertising budgets have been cut, and the buyers have simply disappeared. Where is the price today? Ask the bond-traders….for they will tell you: "where-ever the bid happens to appear!"

No, now, or soon, ALL manner of people are or shortly will-be out of work. Now, real businesses will go bankrupt. Now, everyone becomes cautious. Now, one’s worth has been halved and security diminished, and uncertainty increased. Now is NOT the time the seller has his or her way with prices. Now, the seller is lucky to find a bid, let alone a buyer. Now, the seller will lucky to have someone even view their property that they wish to sell. Now is the time the smart seller hits the bid when he finds it. Now, the smart seller is the one who can imagine and conjure images of how low prices can go, and how elevated the even-scarce bids are in comparison to but a few years ago.

In the same vein, too perhaps we will witness a return from outer space of art, antique and other emblematic late-cycle tell-tales. Transfer fees? Sports-ticket prices? Even the vaunted Honus Wagner T-104! Deflation? Yes, of sorts, but probably not the pernicious kind of the thirties but rather a demolishing of the last decades’ relative asset price bubbles - from the Gucci bag, to a year at Harvard, en primeur first growths to eccentric collectibles and five-star hotel room rates in comparison to their rack prices.

I do have a requirement for a family home, though I am not without a place to live. And I saw several places that would suit quite perfectly. But as an economist, trader, investor and pseudo-seer, I am choking at the thought of buying before the coming compression at the top-end. And this causes both anxiety and marital discord. I know what my instinct says, but this is obviously not "everything". Thoughts, strategy or advice anyone?!?!