My Single Biggest R/E Mistake
4-16-23
Opening Comments
I wrote about the rain last Wednesday which was wild. Turns out that just south of me received up to 25.9” of rain in the day closing the Ft. Lauderdale airport. Some reports have areas of 30”+ of rain in 24 hours. The previous record was 14.6” at the airport. For perspective, Las Vegas gets 4” a year, Phoenix 7” and San Diego receives 11” during the full year. The meteorologists are suggesting it is a 1 in a 1,000 year storm. Some places received 20” in 6 hours. I have a low IQ and drove to and from Miami Lakes in the storm for a meeting which resulted in numerous accidents on the highway. Boca gets about 50-60” of rain a year with the June, August, and September being the worst months for precipitation. Paradise has a cost and it is heat, humidity, and rain. South Florida generally does not get much heavy rain in April. I do not recall 25” of rain in a day in a day, even during a hurricane. Incredible pictures in this CNBC link. This AP link explains the weather phenomenon which caused the flooding. Most of the gas stations near me are unable to pump gas given water in the lines. Last week, I paid $3.37 for gas and just found some for $4.31 and waited in line for it.
Markets
GS Positive Market Technical Analysis
Consumer Pressures
NYC Exodus Continues at a Slower Pace
Other Headlines-A lot of crazy stories today.
Miami Condo Insanity Continues-Surf Club
Good Charts on Housing/Mortgages Including 2nd Homes & Rents
Office Vacancy Changes in Chart since 2020 by City
Euro Office Market Concerns
The Benefits of Home Ownership vs Renting
Covid-New Strain with New Symptoms-India Cases Growing
Picture of The Day-Kelly Slater Wave Ranch-Fresno, CA
I have wanted to go to the Surf Ranch for ages and am heading to Fresno Thursday night to surf an AMAZING wave. The Most Interesting Man in the World invited me with a group. I have not surfed in over 2 years, so I am going to be rusty, but hope to have some good videos/pictures of my skills. Here is a great video of the wave which can last 45 seconds. My legs might fall off if I ride a wave for that long. I land at LAX April 20th at 7:40 pm. Rent a car, and grab dinner somewhere (ideas welcome). Getting a hotel on the way to Fresno (200 miles north). Surfing on the 21st in the afternoon and until 4 pm on the 22nd and on a redeye back out of LAX on the 22nd at 10:30 pm. I am very excited but wish getting there were a bit easier. I’ll need dinner on Saturday night before the flight and again, open to ideas.
My Single Biggest R/E Mistake
When I moved from NYC to South Florida, I laughed at how cheap R/E was down here. I sold my PH on Park Ave to Sandy Weill at the peak of the market in November of 2016 taking a view that NYC R/E was overvalued and literally bought a house 2 times the size with a four-car garage and a short drive to the beach for 25% of the price. Turns out I was a genius, not really. I should have bought EVERYTHING in sight, but I did not. If I took the money from my Park Ave apartment and redeployed it down here in 2017 blindfolded, I would have tripled my money while my apartment value has fallen by 25%.
In the summer of 2018, a broker friend called me about a horrific home for sale, which had been listed for three years. Yes, pre-covid, big homes did not move so easily in South Florida. Someone with bad taste built the single ugliest house I had ever seen (19,000) feet on the Intracoastal. It was a knockdown. I looked at it and thought, I could tear it down and build two insane houses on the 55,000 ft waterfront lot with 473 feet of water frontage. However, to make the math work, I needed to get over $20mm for the big house. I would have kept the smaller one (22,000 ft lot). At the time, these prices in Boca were unheard of. When I moved in 2017, one home sold for over $10mm that year and the average price was $4.9mm. I feared $20mm+ in Boca was not in the cards at the time.
I thought about it and could not get myself to pull the trigger for $10mm on the massive waterfront lot which was actually two lots combined (important for easy division purposes). The house sold and someone knocked it down and built an incredibly ugly house in its place.
Given the pandemic, prices went parabolic, and my fears about selling at a high price were for naught.
The larger lot (33,000 ft) would have had a 12,000 ft modern home and the smaller lot, an 8,000 ft home. Today, I think I could have gotten a total of $60mm+ for those finished homes. My total cost would have been $25mm range (pre-pandemic pricing). No one accused me of having a high IQ, and this was a perfect example of my stupidity.
What made me think of my catastrophic mistake? A house in my community just listed for $52mm. The house was built 25 years ago, but the lot is 1.7 acres of insanity. That is a LOT of land. Point is, prices in South Florida have gone parabolic and when I moved here 6 years ago, this house would have sold for under $15mm. I am not convinced a 25 year old home is worth $52mm, but the markets will tell us in short order.
Yes, I have made countless mistakes in my life on the investing front, but none are as painful as the R/E misses from five to six years ago when I moved down. They could not give homes away down here and I lacked the nerve to buy everything up in sight despite feeling it was cheap. Next time you see me, please remind me of my idiocy.
Quick Bites
Stocks rallied 1-2% on Thursday after another cooler inflation report with the March Producer Price Index showing a decline of .5% relative to flat expectations. I called peak inflation last summer and am happy it is falling more sharply now. Higher rates, tighter lending standards, and the banking crisis… all play a part. The issue is what does the economy look like in the 2nd half of the year, and what will earnings be doing? On Friday, JPM posted record revenue (beat expectations) and the stock was +6% on the news. Stocks sold off slightly Friday (-.5% or less for major indices) but remained positive on the week. The Dow notched its fourth-straight positive week, rising 1.2%. The S&P 500 and the Nasdaq, meanwhile, nabbed their fourth positive week in five. The broad-market index added 0.79% for the week, while the Nasdaq ticked higher by 0.29%. Treasuries sold off on the report of slowing inflation. The two-year is back up to 4.09% and the 10-year 3.51% with the 2/10 curve inverted by 56bps. Oil was up 3.5% on the week and is now almost $83/barrel after being as low as $65 less than one month ago bringing oil up 2.5% YTD. The rally in BTC ($30.5k) and ETH ($2.1k) continues and ETH just got a tech upgrade. YTD, BTC is +83% and ETH +75%.
GS came out with a technical analysis of the market which was surprisingly bullish despite earnings which are forecast to be -7.6% for Q1. GS claims positioning is very short with a high bearish sentiment. Some metrics are the highest short level in 11 years. Equity and Fixed Income Macro Liquidity are high. You have the US corporate Blackout Window for stock buybacks until 4/28 which will bring in even more liquidity. There were others, but you get the gist, it is quite positive on the technical from the GS perspective.
I have been harping on the consumer which has been more resilient than I thought, but more signs of cracks are showing due to higher rates, rising debt levels, inflation, and tighter lending standards. Advance retail sales in March showed consumer spending fell twice as much as expected. Retail sales declined by 1% last month, more than the 0.5% drop expected by economists polled by Dow Jones, in part because consumers paid less for fuel. This article discusses the consumer coming under pressure. Cox Automotive is reporting that new car prices fell for the 3rd month in a row to below MSRP for the 1st time in 2 years. Credit applications to buy cars are down 23% YoY in the 1st week of April. New vehicle inventory was 1.89mm units up from 1.8mm at the end of February. Today, 17% of vehicle payments are $1,000/month or more relative to 5% in 2017. Additionally, auto loans lasting 6-7 years were 1% of the market in 2005 and are 30% today. The US Savings rate peaked at 33.8% and is now down to 4.6%. Credit card debt is almost $1 trillion in the US and the APR is now 24.2% according to this Forbes article from this week. The average credit card balance in the US based on Federal Reserve Bank of NY data is $7,951. Given higher rates, inflation, wages not keeping up, crashing savings rates, and cracks in retail sales, I do believe the consumer will continue to come under pressure, and am anxiously anticipating data in coming months.
There are a couple of stories about surveys taken about New Yorkers and their desire to leave paradise. This link shows nearly 1/3rd of New Yorkers want to leave due to crime, housing costs, poor schools, political leadership and taxes. A total of 40% of respondents said New York is not a good place to raise children — including an alarming 61% of black respondents — and 26% said the overall quality of education is fair or poor as a statewide debate rages over opening more charter schools. This article shows that over 10,800 New Yorkers moved to Florida in 2023. However, this is down from the 14,834 New Yorkers who left in the 1st Q of 2022. I loved living in NYC as a young, single person who was making a great living. It was fun, safe, and despite the high prices, I had the time of my life. Bad policies, crime, homelessness, poor services, cost of living, and quality of life pushed me out of the place I once loved. The fixes are just not that hard, but they require leadership, something we are sorely lacking. Manhattan’s rent rose to a record high of $4,175/month in March, up 13% from one year prior. Just another reason to want to leave the city. I just spoke with a 30-year old hedge fund analyst. He plans on moving to Miami over the cost of living, quality of life, weather, and taxes and given WFH, it is happening more regularly. This age group/work type was unheard of pre-pandemic. I have quite a few families struggling to find a home or get into schools coming from the tri-state area. This is one of the reasons the migration is slowing, South Florida is getting crowded. This Bloomberg article is about high taxes and cost of living making it tougher to get by in some major cities which included: Honolulu, NYC, SFO, Oakland, LA, Long Beach, DC, San Diego, Boston…
Other Headlines
Deficit Tops $1 Trillion in First Six Months of FY2023
This is despite the 2nd highest tax revenues in history at over $2 trillion. Houston, we have a spending problem. Remember, we have debt ceiling issues coming to a head in the next few months. We need to do something about these deficits as we are almost $32 trillion in debt as a country. Reckless spending, rising rates and the desire to win re-election all play a part in this disaster.
Summers Warns US Is Getting ‘Lonely’ as Other Powers Band Together
Jamie Dimon issues warning on rates: ‘It will undress problems in the economy’
Dimon is in the higher for longer camp on rates and feels those exposed to floating rate debt will pay the price.
China's March crude oil imports surge 22.5% from year earlier
12.3mm barrels/day vs 10.1mm.
Schwab Faces Fresh Risks in the Zero-Fee Landscape It Shaped
Firm grappling with declining deposits in wake of rate shock and reports earnings Monday. Stock is -38% YTD vs the S&P +8% and KBW Bank Index-18%.
Elon Musk is reportedly planning an A.I. startup to compete with OpenAI, which he cofounded
Clearly, not enough on Musk’s plate-TSLA, TWTR, SpaceX, Neuralink, Boring, and now a new AI start-up. Where does he get the time?
Restaurant prices are rising faster than grocery prices for the first time since inflation ran hot
Given the labor issues, we are seeing line cooks make as much as $30/hr, hostess can get $35/hr which drive up the cost of dining out. I generally get upset at the food and cost and would rather eat at home. Here is another example of a $31.57 ham sandwich from Eli Zabar’s E.A.T. in NYC.
More women are out-earning their husbands but still picking up a heavier load at home
Your Income Taxes Are Due. Here’s Who Pays The Most.
Lots of good charts in the WSJ link.
Ex-Obama staffer blows whistle on Biden 'kickback scheme' after Hunter joined Burisma
Former White House stenographer pushes to testify under oath in Hunter Biden grand jury case after sending tip to FBI. Mike McCormick claims he was a “witness to a crime” in April 2014. Claims Hunter’s Burisma’s Board Seat was not known at the time, and Biden as VP was pushing to help Burisma in his role as VP. McCormick claims his records are in the White House records, and the FBI is ignoring him. If paying a porn start gets an indictment of a former President, surely this warrants an investigation.
Biden’s poll numbers look grim as he preps for reelection bid
Dianne Feinstein faces down Democratic firestorm
She is 89 and has not been able to serve since early March due to shingles. I had shingles at 27 years old and missed 1.5 days of work. People are calling for her to resign, as she has missed dozens of votes. She asked to be “temporarily replaced” on the Judiciary Committee. Hello. You are 89 and senile. Time to step down, but thank you for your decades of service. Age limits please for all members of the House, Senate and President. Must be 70 or less when sworn into office. Also, some form of cognitive testing is needed.
Justice Thomas failed to report real estate deal with Texas mega donor
Between the trips and the R/E deals we should see some kind of an investigation here. However, this Business Insider article suggests there are no rules preventing Justice Thomas from these actions.
DeSantis signs 6-week abortion ban legislation in Florida into law
George Santos to announce reelection campaign Monday
Please find someone who is not a habitual liar. This is embarrassing and even more so if he wins re-election.
Man behind Discord group that leaked sensitive US intel docs ID'd as Jack Teixeira
The job he had required a high-school degree, a driver’s license, and up to 18 months of on-the-job training. Seems like he had access to a lot of valuable info for someone so junior. Can someone explain? How does a low-level employee have access to such critical info? The leaker does sound like video gaming, gun lover who was religious.
Police Arrested A Tech Executive Over The Stabbing Death Of Cash App Creator Bob Lee
I made the wrong call here. A tech exec/acquaintance, not a homeless criminal apparently killed Lee. Sounds like the murderer killed Lee over questions about Lee’s involvement with the killer’s married sister.
NYC juice shop worker stabbed, gravely wounded in clash with woman
This is on 61st and 3rd at 8:30pm.
Sorry DA Bragg, you can do better than this.
He had been previously arrested for aggravated robbery and family violence.
A mass shooting tied to an Alabama birthday party leaves 4 people dead and a ‘multitude of injuriesWhat Chicago requires immediately is deterrence.
Wealth is leaving Chicago in droves. The residents voted out Lightfoot for Johnson, who I am not convinced is any better on the crime front. Elections have consequences and Chicagoans continue to pay the price for it.
California power companies roll out fixed-rate bill proposal
Income-based electric bills proposed in CA. Link has amounts based on income.
Washington bill allowing government to ‘hide your kid from you’ clears House
The Washington House has passed a bill allowing shelters to keep runaway juveniles from their parents to get an abortion and/or gender surgeries that include removing a girl’s breasts or uterus.
French rioters storm Paris HQ of luxury goods firm behind Louis Vuitton
Arnault (world’s richest) runs LVMH and the protesters want the wealthy to fund the pension.
Goldman Sachs hands out ‘pronoun’ pamphlets as it fights sex harass suits
MIT scientists find way to treat, reverse Alzheimer's disease
This could be a major breakthrough that results in “dramatic reductions” in neurodegeneration.
‘Allergy Capitals’ 2023: These are the 10 worst U.S. cities for anyone with pollen allergies
I have environmental allergies and they are not too bad in South Florida. When I travel in the spring it gets brutal.
Real Estate
Miami's hot market for high-end condos shows no signs of cooling. My broker friend, Devin Kay from Douglas Elliman, told me this story. A client wanted an apartment in the Surf Club on 91st and Collins. There has been very little supply. A 3,000 ft apartment came on the market, and Devin went to see it. He felt the layout was not ideal given the owner turned a once 3-bed into a 1-bed with an office. Devin’s client would need to spend $1.5mm to turn it back to a traditional 3-bedroom. The clients wanted to see it and scheduled to fly down. The listing agent told Devin that offers are coming in and there is no time. Devin’s client put in an offer $200k above the $12.5mm ask SIGHT UNSEEN and were not close, as the condo traded for approximately $13.5mm. This is within days of the original listing. I have been to the Surf Club half a dozen times and can tell you this place is stunning with amazing service, amenities, and restaurants. Lots of big hitters live here. The listing for 9111 Collins Ave #N-919 is here. The owner bought the apt pre-construction for $6mm and moved into it in 2018.
A reader sent over a couple good charts on housing. The first one shows a sharp decline in mortgage applications in recent months. We are down to 1995 levels given rates, affordability and inventory levels. The 2nd chart shows mortgage rate locks for 2nd homes which have fallen 52% from pre-pandemic levels. Remember, the levels were +89% in August 2020 relative to pre-pandemic levels. If you have been waiting to buy a 2nd home, better values coming. The last chart is from a WSJ article on rents falling. The link shows data by city.
Some Morgan Stanley financial analysts say the commercial real estate industry could be headed for a crisis worse than the 2008 great recession. This comes after businesses have left downtowns across the country with an increase in remote work and higher interest rates. Many downtown buildings are owned by investment firms who rely on bank loans. But with businesses not renting as much office space and rising interest rates, some worry these firms may not have the money to pay back the banks. The chart shows the change in vacancy rates from 2020-2023, not the vacancy rate. On a related note, Tishman Speyer Eyes $485M Loan Extension at Depleted 300 Park. The CMBS loan went to special servicing due to an “imminent balloon/maturity default.” Salesforce will exit the last of it holdings at 350 Mission. A combination of layoffs and hybrid work are contributing to the decision. The vacancy rate in SFO is 32.7% and growing. The availability rate must be approaching 40%. Pre-pandemic, the SFO vacancy rate was sub 4%.
Concerns are mounting around the health of Europe’s commercial real estate market, with some investors questioning whether it could be the next sector to implode following last month’s banking crisis. Higher interest rates have increased the cost of borrowing and depressed valuations in the property sector, which in recent years reigned supreme amid low bond yields. The ECB earlier this month warned of “clear signs of vulnerability” in the property sector, citing “declining market liquidity and price corrections” as reasons for the uncertainty, and calling for new curbs on commercial property funds to reduce the risks of an illiquidity crisis.
As the housing market grows more unaffordable, there's more bad news for young Canadians who feel like they will never own a home. A new study by consulting firm Mercer Canada says millennials who are lifelong renters will have to save 50 per cent more than their home-owning counterparts to have enough money in retirement. One of the main reasons is homeowners can reap the benefits of home price appreciation, lower shelter costs in retirement and more financial wiggle room from built-up home equity. "Homeownership also gives retirees flexibility, as retirees who downsize may be able to access a significant amount of money," the report said.
Covid
The US data has improved with cases, positivity rates, hospitalizations and deaths all continuing the downward trend. However, a new strain in India is concerning. It is quite contagious and has kids infected get “sticky” eyes. There are some cases of XBB.1.16 in the US as well according to the article. India has seen cases go from under 300 in early March to over 11,000/day in mid-April.
Thank you Eric