So the statistics are finally starting to emerge, and nobody but the
spokespersons for our real estate brokerage industry, our debonair
denizens of denial and flagrant fanners of fantasy can gainsay the
obvious: the housing market is softening, and it is doing so quickly
and rather dramatically. Prices are softening, unsold inventory is
rising quickly, and new construction is clearly on the decline. The New
York Times pointed all this out in its May 9 Business Section and, as
we all know, once the ?Old Grey Lady? spots a trend, it?s well underway
or, perhaps, very nearly over.
Real estate investors, over the
last couple of years, are the equivalent of the late 1990?s high-tech
moguls, persuaded beyond any reason that profits were limitless and
that the market would, indeed, go up forever. Yes, folks, it?s the
tulips again! For those who may not recall 17th Century Holland (all
evidence to the contrary notwithstanding, even I can?t remember back
that far), irrational and maniacal speculation in tulip bulbs in that
era drove the prices up exponentially, until, predictably, the market
crashed. I say, ?predictably,? even though every time speculative
frenzy overtakes society, whether it be a dotcom investment environment
?unburdened by earnings? or a frothy real estate market which must go
up forever because ?they ain?t making any more,? we seem to have to
learn the same lesson over and over again.
Is it a lack of
intergenerational memory? We certainly don?t have much sense of
history, yet most of us know at least something about the Great
Depression and Stock Market crashes of the past. Is it mere
self-deception, i.e., the determination to think ourselves so clever
that we?ve all become real estate moguls? In the late 1990?s, I
remember clearly being surrounded at my tennis club by 20-somethings,
knee-deep in internet-land, sipping well-aged single-malt scotch, and
puffing on expensive cigars, secure and, indeed, smug, in their status
as ?captains of industry.?
I wonder what happened to those guys?
In
truth, it is hard to say why we seem to have to keep learning the same
lessons over and over again. This is, perhaps, a question better put to
sociologists, and not to lawyers and financial people. But the
consequences are, as ever, predictable, to those who see the writing on
the wall.
In a previous article, I pointed out that the decline
in housing values, coupled with other developments in banking, consumer
lending and revisions to the Bankruptcy Code all portended very poorly
for the American Middle Class. Depending on what happens in this area
in the near future, a similar prognosis may, I am afraid, await the
Upper Middle Class who also have a great deal of their wealth tied up
in their homes.
Until only a few months ago, clients and
colleagues were begging me to find them deals in ?distressed?
properties. There was, at the time, virtually no such thing, because no
sooner had someone gotten wind of a property owner with a financial
problem, that the bidding war began, raising ?distressed? properties
fully to market value (there may well have been no such thing as
?market value? either). Now I have the very clear sense that those
properties may soon be plentiful. Those who have had the sense to ?keep
their powder dry? and who have the foresight over the next year or two
to begin nibbling at opportunities and the patience to hold the
properties they acquire, will, in this writer?s opinion, be
well-rewarded. Much as the good leavings of the dotcom meal were
feasted upon by so-called ?vulture funds,? the sharks may soon be
smelling the blood in real estate, and might be slowly, oh, so slowly,
beginning to circle.
Warren R. Graham
Copyright 2006
Warren
R. Graham is a New York attorney with the Firm of Cohen Tauber Spievack
& Wagner LLP. He is a frequent writer on a variety of topics,
including legal matters, political and religious affairs. His opinions
are his own and do not necessarily reflect the views of his firm or its
members. Additional information on him may be found at either http://www.ctswlaw.com/templates/page3_attorney.asp?docid=667 or http://warrenrgrahamlegal.blogspot.com
