The Coming Real Estate Crash

Was it the canary in the coal mine? Last week former Beatle Paul McCartney sold his Fifth Avenue co-op at a considerable loss. You see,  he had bought the apartment some seven years ago for $15 million or so. He just sold it for $8 million and change.

Of course, we understand that he could afford to take the loss. Besides, the coop was not in one of New York’s finer co-ops. From the outside it looks singularly unimpressive.

Anyway, that is neither here nor there. More significant is the current asset bubble, bubble that has not just bloated the stock market and the art market, but has seriously inflated the real estate market. 

So, we have followed the musings of famed asset manager Jeremy Grantham, who believes that it is all going to fall down. Now, we read in The Federalist, that real estate prices are in bubble territory, puffed up by the Federal Reserve.

Justin Haskins reports for The Federalist:

The average sales price of a home in the fourth quarter of 2021 was $477,900, compared to $403,900 in the fourth quarter of 2020 and $384,600 in the fourth quarter of 2019. That’s a $93,300 increase in just two years, by far the biggest increase ever recorded in just 24 months.

Further, the 12-month home sales price increases for the second, third, and fourth quarters of 2021 were all above 17 percent, the highest hike recorded over a three-quarter period since at least 1963, the earliest date in the Fed’s data made available online.

Put simply, Americans have literally never seen housing prices skyrocket like they are now for this long of a period. And every time they have approached the numbers we are seeing today in the past — in the 1970s, late-1980s, and early to mid-2000s — there was a massive real estate or stock market crash that soon followed (or both). There appear to be no exceptions, other than a few rare cases where housing prices increased quickly immediately after a crash had occurred.

Evidently, Fed tightening will bring down the prices. You didn’t hear it here first, but you heard it here.

And then, the same theme has been playing out in downtown Manhattan. You may know that residential real estate has been very strong in New York City. People are buying apartments at ridiculous prices, and the newspapers are breathlessly reporting on it.

Therefore, we were somewhat shocked and slightly dismayed at a Wall Street Journal article about ghost condos. What is a ghost condo? Why, the Journal explains that it refers to one of several downtown condo projects that developers have stopped work on. The frames exist. The superstructure exists, but for now the buildings will not be completed.

It does not signal a strong market. The Journal begins with a building called One Seaport, where work has been halted because the building seems to some people to be tilting. Hmmm.

Not a very good look.

One Seaport was one of a handful of condo skyscrapers conceived in the mid 2010s, when the Manhattan condo market was booming. They were designed to bring a taste of Billionaires’ Row to lower Manhattan, a neighborhood that had become an emblem of New York’s resilience after 9/11. Supertall and slimline, they were bold and architecturally significant with prices to rival those uptown. Nearly a decade later, many of these plans were dropped or stalled, thanks in large part to a subsequent decline in the New York luxury market and, in some cases, construction difficulties and developer infighting.

The paper reports on a couple of other projects that have, speaking optimistically, been put on hold.

If the real estate market is about to fall apart, these projects will also count as leading indicators.

Apparently, it’s not a great time to rush out and buy real estate.