The real estate moonshot

Will homebuyers in the Hamptons burn up on re-entry...?

JAMES DOOHAN, the actor who played Scottie on Star Trek, just went where no man has gone before.

   Well, at least where no man's remains have gone before. And he wasn't alone, he had a cabin mate.

Mr Doohan died a couple of years of ago. But on April 29th his ashes – along with those of Gordon Cooper, a real live astronaut, so to speak – were launched into space via a privately-run rocket ship called the Spaceloft XL.

  
What could be a more fitting tribute to Scottie, the earnest engineer who always managed to get a wee bit more of the Enterprise just in time to get Capt. Kirk out of a jam?

  
At last Scottie could accomplish his dream of breaking the shackles of earth to plunge headlong into the unknowable darkness of infinity.

  
Except that he wound up in New Mexico.

  
Even though the SpaceloftXL was a real live rocket charged with carrying out real “experiments”, once the capsule reached the edge of space it popped its shoot, reversed trajectory, and floated back to the earth.

  
No journey to the edge of the universe. No alien encounters. To the layman, the SpaceloftXL looks a lot like a super-sized version of the model rockets launched every day on soccer fields across America. But instead of a toy soldier, it was Scottie who was wedged into the capsule.

  
It all makes you wonder what the “experiments” were anyway. To see if they could land the thing without getting it stuck in a tree? If so, success is hardly assured. The rocket, along with its cargo, is lost on a mountain in the Land of Enchantment. For Scottie, eternity is filled with Southwestern architecture.

  
US home prices experienced a moon shot over the past few years, too. But yet they have also fallen below their peak trajectory.

  
There are plenty of stats to describe the unwinding of the real estate bubble that turned shelter into a "can’t miss" investment. One such figure is the number of vacant homes sitting on the housing market waiting for something good to happen.

  
According to the Census Bureau, on March 31 there were 2.2 million homes vacant and for sale in the United States. That’s the highest number since at least 1965. It’s also a 57% increase over two years before, when 1.4 million homes were both empty and on the market.

  
The increase in unsold homes says a lot about the investment characteristics of single family housing. It also points to momentum investors losing altitude...along with confidence in their parachutes.

  
That is, they want out. Now.

  
Naturally, the vacant homes are adding to existing home inventories, a metric which came in 17.1% higher in March than the year-ago level. And because the rate of home sales slowed, when measured as months of supply, inventory actually increased to 7.3 months.

  
Inventories of new homes, meantime, are setting records of their own. New homes for sale at the end of March reached 545,000 up from 544,000 in February. Although the supply of new homes dipped to 7.8 months vs 8.1 months in February, the February rate was the highest in 16 years according to Bloomberg.

  
Oh, and the inventory of new homes may be understated, because the data do not include cancellations.

  
Builders hate this inventory bulge. They are giving away swimming pools to cut back their own backlog, as well as writing off options on raw land and refusing to build on the land they retain. What they can’t control, however, is the refusal of sellers to pull their own homes off the market like Mr Greenspan said they would. How annoying.

  
Another couple of things are happening that were not supposed to happen, too. First, people weren’t supposed to get in a bind to sell – because, after all, if you have a house you can just live in it. Number two, housing prices weren’t supposed to go down, because if you can live in a house, what’s the rush to sell at a loss?

  
But somehow people are in a bind to sell, so many of them in fact that home prices are dropping. This is virtually unheard of behavior in a market that the former Fed chairman assured us was not like the stock market.

  
Part of the problem is that houses become a lot less livable when mortgage rates adjust higher. Or when property taxes hikes outrun income growth. Or when homes turn from an investment to a liability.

  
There are those folk, however, who still think that some markets are immune to gravitational forces simply because of their special location on the planet. Take Frank and Roy Dalene, who according to Dan Dorfman in the New York Sun are starting a $100 million real estate fund to do tear downs in the Hamptons.

  
Specifically, 1,000 shares will be offered to investors at $100,000 a share. The pitch:

1. The Hamptons are the Hamptons.
2. Despite the numerous For Sale signs even there, the ultra high end market is impervious to a downturn.
3. There are plenty of ratty million-dollar houses that can be bulldozed and replaced with homes going for upwards of $10 million.
4. The Dalenes already do 75% of their luxury home building business with Wall Street folks.
5. Last year Wall Street scored an estimated $24 billion in bonuses.
6. You can’t spend all that money on fast cars and big art.

  
It will be interesting to see how the fund performs given that the Hamptons may be the epicenter of more bubbles ever to descend on a single location in history. Certainly the Hamptons are the beneficiary of the investment banking, private equity and hedge fund bubbles, as more players in those credit-fueled endeavors now call the Hamptons home. Or Second Home.

  
And according to realtors that Dorman interviewed, the Hamptons are also the hot ticket for rich foreigners, eager to take advantage of a weak Dollar – a symptom of excess credit generally.

  
In what could turn out to be a classic bubble in a bubble event, a single hedge fund may buy all 1,000 shares of the upstart fund, a reminder not only of the Hamptons’ powerful mystique, but also that often there is no “hedge” in “hedge fund”.

  
But unless the Hamptons can repeal the laws of credit bubbles, the trajectory of even the Dalenes’ favorite market is bound to roll over as the various bubbles unwind. Whether Hamptons' homeowners will merely have a bumpy ride – or burn up on re-entry – is anyone’s guess.