There's Blood in the Water and the Sharks are Beginning to Circle
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Added: 05/17/2006
Type: Summary
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There's Blood in the Water and the Sharks are Beginning to Circle
Wishful thinking and self-delusion can no longer mask the reality of a noticeably softening housing market, and once again, and in an eerie echo of the end of the dotcom paradigm, an end to the speculative frenzy in real estate can be achieved only with bloodletting.
"As the statistics finally start to emerge, no amount of wishful thinking, self-delusion or clever, obfuscational marketing by brokers can mask the reality of a noticeably softening housing market," says Warren Graham, a New York Bankruptcy Attorney with over 25 years of experience.
"Prices have topped out and are, in many places in the Country, starting to decline, and are doing so quickly and rather dramatically. Unsold inventory is rising quickly, and new construction is clearly on the decline," says Graham, relying on statistics published, among other places, in the New York Times of May 9.
Graham compares many recent amateur real estate investors, over the last couple of years, to the late 1990’s high-tech "moguls," many of whom had little or no experience in the field and had experienced, in their young lives, nothing but fast, easy money. Some gave up well-paying jobs to become 'day traders. They were, says Graham, "persuaded beyond any and all reason that profits were limitless and that the market would, indeed, go up forever." He points out that "the speculative overkill in real estate, much like the high-tech boom which preceded it, is merely the same old rehash of the tulip frenzy of 17th Century Holland, in which tulip bulbs became ridiculously unaffordable until, predictably, the market crashed."
"Although predictable," says Graham, "it seems that every time this kind of fever 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,' investors seem to have to learn the same painful lesson over and over again."
Graham wonders whether the cause for this continuing historical rerun lies in 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." Or, one might contemplate, says Graham, " that the cause may be found in simple self-deception, i.e., the determination to think ourselves so clever that we’ve all become real estate moguls." In the late 1990’s, Graham recalls, "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.' Where are they now?" asks Graham.
Graham notes that until only a few months ago, clients and colleagues were begging him to find them deals in “distressed” properties. There was, at the time, he says, 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, says Graham, no such thing as “market value” either). Now, Graham predicts, "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 be well-rewarded."
In summary, Graham points out, "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 may be slowly, oh, so slowly, beginning to circle."
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