Dear Fareed:
I don’t understand the real estate “rebound.” A few weeks ago there was an article in the Times saying that the average price of co-ops in Manhattan had doubled in the last five years. To buy these expensive digs, people got money from the stock market (either equity received as compensation or earned from investments), increased salaries, or debt. But where are they getting the money now? The stock market has corrected and may correct some more. Equity for compensation is no longer the windfall it was three years ago. (Forget the effect of Sept. 11; my life has improved because I no longer see guys order a mocha grande cappuccino, while whining into their cell phones about a lousy 1.5 percent with a two year lock-up.) Investment banks are laying off people by the thousands. And those lucky enough to keep their jobs have not enjoyed large bonuses. So, who are these people lining up to pay $2 million for 3,000 square feet in Tribeca? Maybe it’s the low interest rates. Are people simply increasing their debt? I don’t get it.
I know what you are thinking. Yes, your wife is a bear. And, as you always remind me, I did sell Microsoft in 1997. But, there is another problem. Prices reflect what something (a house, a car, a stock) is worth at the time of the transaction. But they also reflect the perceived future value. You pay a million dollars for an apartment because you need somewhere to live and you like the neighborhood. However, you also think that the neighborhood is getting fancier and the good school system will protect your investment. It’s worth it to spend the extra money for a BMW because they have higher resale values than Volkswagen. Many people plunked down money during the boom because they expected prices to rise. Real-estate developers built buildings, retailers built new stores. Even if we aren’t in a recession, the future is much less rosy than it was a few years ago when everyone was talking about the miracle of eToys shipping Barbie Dolls (“and it just showed up in a UPS box!”). These reduced expectations should have an effect on pricing, sooner or later. But they don’t seem to. It doesn’t make sense.
Did you see in the New York Times that in Nigeria there are churches whose primary focus is helping people to make money? They have tens of thousands of members. Speaking before the congregation one man told how he finally got a new job and, “had a rest, the kind of rest you have if you have a big account somewhere.” We could start a new church in New York for people with real-estate envy. Imagine it: bake sales and block parties, with the proceeds going to a real-estate fund. And the inspirational speeches: “If you see a wood-burning fireplace, you can have one.” I am ready for the kind of sleep that you have if you live in a Fifth Avenue duplex looking over the reservoir. A few years ago, I would say that we could take this public, the first Internet real-estate church. But these are hard times. We’ll settle for 5,000 square feet and a room with a view.
