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Why the stock market's up, while luxury real estate is down

You might not think that Barack Obama, Giorgio Armani and Lachlan Murdoch are bargain hunters, yet each of them just bought luxury property for much less than the original asking price.

Is this about their business acumen? Maybe. But more clearly, these deals speak to a number of under-recognized financial crosscurrents—everything from central bank policy to taxes to technology and trade wars—roiling the world of real estate.

To begin with, weakness in high-end real estate doesn’t make sense right now. The stock market is roaring ahead, and with wealthy investors benefitting disproportionately, prices for mansions, trophy homes and apartments should follow suit. 

Not this time.

MARTHA'S VINEYARD, EDGARTOWN, MASSACHUSETTS, UNITED STATES - 2012/10/01: Stately summer beach house, South Beach. (Photo by John Greim/LightRocket via Getty Images)

We’ll delve into why this is happening, but first let’s get the dirt on our three celebrity transactions.

In early December, former President Barack Obama and his family bought a 6,892-square-foot house on Martha’s Vineyard from Boston Celtics owner Wyc Grousbeck. Obama paid $11.75 million for the waterfront estate which sits on 23 acres. According to the Vineyard Gazette: “The property has been on the market since 2015, when it was listed for $22.5 million. The price was dropped twice this summer, first to $16.25 million in June, then to $14.85 million in July.” 

Looks like Obama—an avid basketball fan who enjoys playing a bit too—just threw down a dunk on Grousbeck.

Then last week it was reported that the clamorous, flamboyant, bad-boy of telecom (if you can imagine), John Legere, outgoing CEO of T-Mobile (TMUS) (which competes with Yahoo’s parent, Verizon (VZ)) sold his New York City apartment to Giorgio Armani for $17.5 million. Armani, who reportedly owns homes in Italy, St. Tropez, and Antigua is apparently expanding his collezione. The fashionista owns the apartment next door to Legere’s at 90 Central Park West and paid a bit less than Legere did, four years ago. The unit, which overlooks Central Park, previously listed for $27.5 million

Two days later we learned that tycoon-in-waiting, Lachlan Murdoch, son of Rupert, reportedly paid $150 million to buy Chartwell, a Bel-Air mega-estate sold by the estate of media billionaire Jerry Perenchio. Though the sale of the 25,000-square-foot mansion—which was used for the exteriors of the TV show “The Beverly Hillbillies”—set a new record for a house in LA, it falls miles short of its original listing back in 2017 of $350 million. (Granny, never mind Mr. Drysdale, would have been livid about the mammoth markdown.)

Also important here: The LA Times reports that, “the estate carries one of the highest annual tax bills in the Los Angeles area at $1.3 million.” 

Photo by: Dennis Van Tine/STAR MAX/IPx 2017 11/1/17 Rupert Murdoch at WSJ Magazine 2017 Innovator Awards in New York City.

‘I have not experienced anything quite like it’

While the value of all these homes may seem ridiculous to you, note that the three sale prices are down significantly — 47%, 36% and 57% respectively — from what was being asked only a few years ago. These aren’t haircuts, they’re massacres. It’s the kind of price action you’d expect in a stock market rout, not a rally. Remember the S&P is up 28% this year for Pete’s sake!

To New York City high-end Brown Harris Steven real estate broker Lisa Lippman, it’s kind of mind blowing. “I have not experienced anything quite like it in my 22 years in the business,” she wrote in her recent newsletter. “The last time the real estate market did not correlate to the stock market was 1987!” Lippman, who says she continues to be busy, writes that prices overall are down ~13% from the same time last year in NYC, while the total number of sales decreased 16% from the third quarter of 2018.  

All this while the stock market’s at record highs. Curious, no?

Lippman points to a number of reasons for the disconnect. For starters, there’s too much inventory (more on that in a second) and “all types of tax changes: increased mansion tax, increased transfer tax, and changes in SALT [state and local tax] deduction and interest deduction capabilities.”

Let’s talk tax first. The end of the advantage of SALT deductions—part of the Trump tax bill, where only up to $10,000 of SALT can be deducted from Federal taxes—makes living in high tax states less appealing for the wealthy, which is crimping prices of expensive homes. High tax states, like Massachusetts, New York and California (where those three aforementioned sales occurred), just happen to be blue states. (Recall that massive tax bill Lachlan must pay for Chartwell.) A new mansion tax has been implemented in New York City as well. States like Florida, which has no income tax, have benefitted. (Note that the president recently changed his residence from New York to Florida.)

Also on the margin the strong dollar has hurt fancy markets in New York and California as it makes dwellings there more costly for foreign buyers. Chillier global relations with other countries—particularly China of course—haven’t helped either.

But high inventories and paradoxically low interest rates may be an even bigger problem. “The real estate market has gotten so good over the last number of years,” says Lippman. “Prices since the mid-90s have gone up and up, maybe faster than the general economy. A lot of developers ran to build new buildings creating more inventory. People got nervous, inventory started building up more. There’s a snowball effect. Inventory builds up, builds up builds up.” 

Consider Hudson Yards in New York City with its 4,000 units coming online, said to be starting at $3.9 million.

NAPLES, FLORIDA, UNITED STATES - 2019/03/22: High end estate and security gate. (Photo by John Greim/LightRocket via Getty Images)

‘I call this era peak uncertainty’

Cra-cra for sure, but it still sounds like fairly typical boom and bust stuff. Except if you scratch below the surface, says Jonathan J. Miller, a New York-based real estate consultant and CEO of Miller Samuel, you’ll see something more curious at work. It’s a distortion created by ultra-low interest rate policies. 

“A lot of this circles around speculative markets born out of the financial crisis more than a decade ago, where central banks around the world [lowered rates to] zero or close to it,” Miller says. “Investors were looking for higher returns in a low interest rate world. They wanted to invest in tangible assets rather than financial [assets.] Money poured in.” 

First prices for real estate soared, followed by building and oversupply.

At the same time technology has played its usual disruptive role. Lippman notes that digital listing services now provide almost complete transparency in the marketplace, reducing pricing opacity and the power of brokers. “Buyers started looking on StreetEasy, and as soon as something is on the market longer than 60-90 days, prices soften for that property,” she says.

And then there’s another factor, unusual at this point in the cycle. “I call this era peak uncertainty for high end housing,” says Miller, citing fear of even more taxes—perhaps from the likes of Elizabeth Warren or local politicians—as well as trepidation over signs of conspicuous wealth. “People scratch their heads and say I don’t understand how the stock market is good with this president,” says Lippman. “What’s the direction? What’s he doing? A lot of people out there think we’re on the verge of the stock market crashing.”

Like an inverted yield curve signaling little faith in future growth, the weak high-end real estate market suggests the wealthy are afraid the end is near when it comes to stock market highs and a healthy economy. (It’s worth noting they could be wrong.)

Where do things go from here? It’s impossible to say of course. You tell me who the real estate market will have to contend with in November: President Trump, Warren, Pete Buttigeig or someone else? And even then who knows. How many of us would have predicted that Trump would have been a negative for New York City luxury apartment prices?

Not long ago, Michael Bloomberg likened NYC to a “luxury product” for which people would pay an exorbitant premium to live in. A bit of hyperbole to be sure, yet it’s doubtless true that despite elections, taxes, trade wars, interest rates and supply and demand, the wealthy will continue to buy in places like Boston, LA, San Francisco, Seattle and NYC. 

And who knows, a President Bloomberg might make real estate there that much more valuable. Or not.

This article was featured in a Saturday edition of the Morning Brief on December 21, 2019. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Andy Serwer is editor-in-chief of Yahoo Finance. Follow him on Twitter: @serwer.

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