As the daily commutes, I have nothing to complain about every day when I point my car to Sovereign HQ. The traffic jam on the interstate 95th main artery of South Florida is terrifying. Therefore, I take a scenic route, a coastal road known as A1A.
The view of the Atlantic is good. But recently I liked the drive for another reason. This is a place in the ring for the extravagance of the now deflating bubble of luxury, which I warned about three months ago. Recent data points more ominously to a serious problem in this sector.
Every day, my A1A drive takes me past what is the most expensive new home for sale in the United States: Le Palais Royal, which has been under construction for the past five years.
Located on 4.4 acres of beach, the “spec mansion” has the Atlantic Ocean as a backyard. The front yard is almost 500 feet of deep water inside the waterway - ideal for even the largest private super yacht.
The stunning front gate of the mansion, accented in a 22-carat gold leaf, makes him drive past. Right outside the gate is a 60,000 square foot home with 11 bedrooms, 17 bathrooms, an 18-seat IMAX home cinema (with a 50-foot wide screen) and an underground garage for 30 cars. Construction plans require a second stage on the vacant side of the beach nearby. It is assumed that there will be an ice skating rink, a trekking track, a bowling alley and a private night club.
And all this can be yours for only 159 million dollars.
But the flow of money stimulating the purchase of luxury homes, large or small, is retreating when we speak.
Luxury homes: the next real estate crash?
In many ways, ignored in the holiday rush was the news that in the third quarter prices for luxury homes fell by 2.2% - the first such decline in almost four years.
According to the real estate broker Redfin, rich clients are retreating from fear of volatility fluctuations in the stock market and are wary of tying up too much of their wealth in illiquid assets, especially if there is another collapse in real estate.
The reduction is even more viable, because luxury homes serve as something like the rest of the non-luxury real estate market (which grew by almost 4% over the same period).
Original stocks of bubble housing decades ago may offer a key to time. Shares of Toll Brothers (NYSE: TOL), the country's largest builder of luxury homes, peaked in July 2005, before a rapid decline. But the prices of builders' stocks, targeting the low and medium price ends of the market, remained strong - at least at the beginning. For example, the shares of Lennar Brothers (NYSE: LEN), one of the largest homeowners in the country, were not cracked until April 2006.
Interestingly, today Toll Brothers shares fell by almost 25% compared with their highs after recovery (to the lowest price in 13 months), while Lennar's shares are just starting to break.
California dream.
Chinese buyers have become key players in the run-up to luxury home prices in America. And their influence is felt most consistently in California and the San Francisco Bay Area, America’s hottest property market.
It is no coincidence that Chinese buyers may now retreat there, possibly entering the next real estate crash. Sales of homes in California fell by 20.5% in November - more than twice the monthly average (this is traditionally a weak month before the end of the weekend). Home sales in October also fell by slightly more than 5%, a decrease of 1.5% in September.
At the moment, the real estate community appears to be rejecting the collapse of sales as a result of changes in the new rules for disclosing information about loans by the Consumer Protection Bureau, as well as, as a rule, a milder seasonal period for selling housing.
I do not blame them. As once in my reporting days, one of the media consultants told me: "Never let too many facts interfere with a good story."
But "Chinese buyers" is a real, real wedding. Last summer, a 40% decline in the Shanghai Composite Index was to be the first key. The second is the relentlessly positive “this is just a temporary” narrative, unfolded by many brokers and developers who do not want the trip to end. We may have the third key here in early 2016, when the Shanghai index drops below again.
So what does this mean to you?
As Jeff Opdyke warned, feel free to say that the Federal Reserve exists. As Chinese buyers recede from American real estate, it provides another leg of support for the US economy.
