Building and selling condos as commodities and not as housing is a sign of the end times...
I was watching YouTube the other night and this video came up. YouTube actually has some decent content, if you look for it. And by the way, the new hotspot streams YouTube flawlessly and with 100GB I just leave the hotspot on all the time. I will be hard-pressed to use 100GB a month!
What was interesting about the video is how New York City has changed in recent years. I haven't been there in quite a while and the latest thing is these new, thin, high-rise ultra-luxury condos that can cost as much as $100 Million apiece. Yea, you read that right, $100 Million. Weirder still, no one lives in them, or few people actually do. Rather, like Bitcoin, they are virtual investments - a way of parking money and hoping maybe someday someone else will pay you $200 Million for it.
Weirder still, the carrying costs on these monstrosities is low. The City has a weird tax code that taxes condos based on rental income (zero) rather than sales price. So a Billionaire with a $2 Million condo is paying $157 a year in property taxes, while a working stiff in Queens is paying $3800 on his hovel. You see how this works - the rich write the tax laws and they stay elected by promising to outlaw something called "CRT" which doesn't actually exist. Why people haven't started a torch-and-pitchfork parade is beyond me. This seems like prime AOC fodder but she seems silent on it - maybe since she bought her "Bougie" condo in DC.
Rich people have so much money they literally don't know what to do with it. As more and more companies go private, there are fewer stocks to invest in - and more of them become speculative "Stonks" that are hyped online and sold to the little people. Investing becomes more and more like gambling and we hear about the big winners but never about the small-time losers. When you are rich enough, you can plow money into alternative investments, like collector cars, fine art, gold, and real estate. Some may increase in value, others decrease or stay the same. But you have the cash, so you might as well spread it around into a panoply of things. Besides, its fun to go to art or car auctions or to look at expensive high-rise condos and talk to your personal decorator.
What is interesting is that this isn't limited to New York City. Such luxury, unoccupied, investment condos are going up in Paris and London and of course, China is building "see through" buildings at a rapid pace and that bubble is already starting to burst.
Yes, bubble. You see, I've seen this before, in Ft. Lauderdale in the 2005-2008 era. Buildings were going up right and left and the people buying the units couldn't afford them and had no intention of living in them. Rather, they would buy during construction, using a balloon note, and then hope to "flip" the unit before the building was finished or shortly thereafter, and pocket a hundred grand or so. And in the early years, that worked - although maybe your net profit was like $20,000 or so, but that was a lot of money back then for middle-class people.
Worse yet, they had to pay capital gains tax on that money - unless they folded it into another property through a Starker deferred-exchange. So they were incentivized to plow that cash into yet another building - and had only 45 days to identify such a property. So they rushed out and bought another unfinished condo and maybe - maybe - made even more money. But eventually, the market became saturated with these high-rise nightmares and since there were no real end users (just investors selling to investors) the whole thing fell apart.
It was musical chairs - and the last one standing when the music stopped was screwed. Problem was, there were 20 people playing and only one chair. I took that chair. I cashed out in early and paid the capital gains tax and moved on.
Will this happen again? You can bank on it, but not literally. Once an asset class becomes nothing more than a placeholder for money, you can be sure you are in a bubble. Whether it is inflated prices for art, collector cars, real estate, gold, Bitcoin, stocks, bonds, or whatever, the actual "investment" is nothing more than a talisman or placeholder for money, not actual value itself. I suppose this trend of "NFTs" is a prime example of what I am talking about. They are worth a lot because someone said they are worth a lot. But they really aren't worth a lot.
Part of the problem is you have a lot of people with a lot of money chasing fewer and fewer assets. The real estate market has gone nuts - people buying houses with carrying costs that far, far exceed any potential rental income. And as in 2008, well, the whole thing hinges on interest rates. Rates go up a point and suddenly people stop buying. That's the problem right there - we've had near-zero prime rates for far too long - each administration wanting to keep the party going and not face the inevitable during their tenure.
Like a rubber band stretching or a balloon being inflated, eventually something has to give - whether you raise rates or not. In our case, it is inflation - it happens whether the Central Bank wants it to or not, if they keep pushing out easy, low-cost money. And the longer the balloon inflates or the rubber-band stretches back, the worse it will be. I thought the real estate bubble of 2008 would burst in 2005, and I was wrong. If it had leveled-off in 2005 it wouldn't have been as bad. But we waited and waited and no one did anything to stop the speculative bubble and the crash of 2009 was the result.
Today? We are even worse off, but it isn't 1929 just yet (although there are signs the party is ending even as we speak) so people keep partying on - open another bottle of champagne! But China is slowly defaulting on its Bonds, and the cost of housing in the USA is "unaffordable" and there is no such thing as unaffordable housing, really - once people stop paying, prices will come down.
It is what I call "overshoot". Gas prices recently spiked, but instead of changing behaviors, people kept on speeding and driving poorly. As I noted before, you can change your gas mileage as much as 25-50% just in terms of driving habits. So prices increase and people bitch and moan and no one does anything and the oil companies (and every other company out there) makes record profits - for now. Joe and Josephine Consumer let their credit card balance increase and it all seems so well. Yes, the Titanic has struck an iceberg, but it won't sink for another three hours. Party on!
"Suddenly" it will seem that the shit got real. Joe and Josephine Consumer find their credit card maxed out. People stop buying over-inflated assets. Maybe a war in the Crimea makes people nervous. People pull back on spending, in a herd-like fashion. This, in turn, means fewer sales, so companies lay people off and report lower earnings. The retiree with his 401(k) sees his portfolio shrink, so he cuts back on spending. Reverse snowball kicks in.
I wish it weren't so, but that is the reality of how these things work and the time to change all of this was about three years ago, but no one wanted the party to end then, either.
When people are spending a hundred-million-dollars buying an apartment that no one will ever live in, you know something isn't right about the economy. It just makes no sense whatsoever. These are the NFTs or Bitcoin of Real Estate!
UPDATE: When the Fed warns of a real estate bubble (as opposed to "froth in the market" last time around) maybe it is time to head for the hills.
