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Super-Luxury Homes Hit by Reversing “Wealth Effect”


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Super-Luxury Homes Hit by Reversing “Wealth Effect”
by Wolf Richter • March 17, 2016

Wall Street’s “Smart Money” with impeccable timing.

This had to happen. Now we’re getting reports that in the Hamptons, on Long Island’s east end, where Wall Street’s richest hobnob over the summer, home prices at the very top, after a phenomenal boom, are getting crushed.

What’s getting blamed? The crummy performance of the markets last year.

The average price in 2015 of the ten most expensive homes sold in the area has crashed 20% from a year earlier – to a measly $35.5 million.

After soaring a mind-bending 180% in five years, from $15.9 million in 2009, the average price of the top ten homes had reached $44.6 million in 2014, according to a report by Town & Country Real Estate in East Hampton, cited by Reuters.

The year 2009 was when the Fed’s “wealth effect” strategy was kicking in. It was precisely what Bernanke wanted to accomplish. He spelled it out in an editorial. The Fed’s “strong and creative measures” would inflate asset prices, which would lead those benefiting the most from it, including those on Wall Street that extract fees and get paid big bonuses, to feel wealthier and spend a little more, which would crank up the economy. And this is what happened in the Hamptons.

Soaring stock prices, a renewed boom in collateralized loan obligations and subprime auto-loan-backed securities, mountains of new issuance of bonds and leveraged loans to fund a historic boom in mergers and acquisitions, the fracking miracle, share buybacks, special dividends back to PE firms, and what not…. It was all there, and it performed as Bernanke had planned. Except it didn’t crank up the economy.

Then 2015 came along, with turmoil, volatility, defaults, and bankruptcies. The S&P 500 peaked in May 2015, propped up by a dozen large-cap stocks, but it was rough sledding for the rest of the year, and many smaller stocks were taken out the back and shot.

After ballooning for years, the average bonus at Wall Street banks “was likely 5% to 10% lower in 2015 than the previous year,” according to Reuters. It was the first decline since 2011. And the good times dried up in hedge-fund land, according to the Barclay Hedge Fund Index: after a derisively small return of 2.9% in 2014, hedge funds outdid themselves in 2015 with a nearly invisible return of 0.04%, a mere rounding error.

And this sort of disappointment shows, in the Hamptons.

For prices at these elevations to set new records, the stock market must be booming for years, explained Town & Country CEO Judi Desiderio. It boils down to a simple fact: real estate in the Hamptons moves up and down in cycles, as Reuters put it, “in lockstep with Wall Street’s fortunes.”

And the record average price of 2014?

“We won’t see this again until 2021 as it seems to run in seven-year cycles,” she said.

OK, those 10 homes were the most extravagant tippy-top of the market in the area. But a similar trend emerged in a broader survey of luxury homes. Real estate brokerage Corcoran Group reported that the median price of the most expensive 10% of the homes that sold in Q4 in the Hamptons – 57 homes – dropped 4% from a year earlier to $7.6 million.

Anthony DeVivio, managing director of Halstead Property, a brokerage in the Hamptons, confirmed that the performance of the markets, and particularly the bonuses, which help finance these homes, are linked. But he hasn’t given up hope. It was just a dip, a correction.

“It’s not something that’s going to kill the market,” he said.

But some very smart folks are selling. In January, the New York Post “learned” that Scott Bommer, who’d shut down his hedge fund SAB Capital a month earlier, signed a contract to sell his ocean-front pad in East Hampton to an unknown buyer for $110 million. Was he timing the market?

Oh no, not a hedge fund guy! Especially not since he made about $16 million on the home in less than two years, after having bought it in 2014 for $93.4 million.

In February, Page Six “exclusively learned” that the buyer was Michael Smith, CEO of Freeport LNG. It owns an LNG import terminal in Texas that no one needs since the US has been drowning in natural gas since 2008. And with that project having failed, the company is building an LNG export terminal to sell US natural gas to customers around the world, just when the price for LNG has collapsed in the global markets.

Impeccable timing?

If the deal closes, it will be the second most expensive price tag ever in the Hamptons, and the fifth most expensive in the US. The most expensive? In the spring of 2014, following a year when the S&P 500 had surged over 30% and only the sky was the limit, hedge fund manager Barry Rosenstein paid $147 million for a place in East Hampton.

Even as the hot air is hissing out of the very top, the overall market is still hanging in there, if barely. In Q4, according to Corcoran’s data, the median sale price of all homes in the area rose 3% year over year, to $1.12 million.

“There are two markets right now,” said Halstead Property’s DeVivio. “On the low end it’s clearly still a seller’s market, and on the high end it’s clearly a buyer’s market.”

So the prime beneficiaries of the Fed’s “wealth effect” are losing their appetite for splurging in this stupendous manner on second or third or fifth homes. All hopes had been based on the theory that this money would somehow trickle down to the layers beneath them and boost the economy. But as commenter “Ptb” said so eloquently, money is different; “Money trickles up, not down.”

Now all hopes rest on buyers with an unquenchable thirst for US assets. And they’re buying under the motto, the bigger the price, the better. Read… Panicked Chinese Suddenly Buy US Assets in Monster Deals at Peak of Seven-Year Boom



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Apr 9, 2013
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I've always been amazed how far valuation can diverge from replacement cost, particularly at the high end.

I understand supply and demand can move sale price around a bit but it seems to be getting really wild lately.

I was talking in the real estate commission thread about a guy who just bought a million dollar house. It broke down roughly as 1/3 million for the three acres and 2/3 million for the house.

They sent three insurance estimators to do the valuation. All three were pretty close and came in at 1.8 just for the house. Adding back the land and it's around 2 million for a million spent.

I just can't wrap my mind around 1/2 price

Now is the time to buy higher end property. Cheap money out there and everything on sale

Good thing I don't like debt.


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Jan 7, 2011
Down in Florida on the east coast most of the best vacant land has already been developed. I am running into seconds and thirds for choices with no new land available because of the Everglades to the west and the Atlantic Ocean to the east.

Have seen it happen already when older homes are knocked down to one wall to avoid impact fees that range from $8500 to $20k+ .

We are in the process of building a new home after taking an 11-year hiatus. I have been building since the early 1990s and move every few years while easily pocketing 20% over and above having enough room to buy new furniture for each new house. There is nothing like designing a home and the smell of new wallboard and fresh paint. Not to mention how effective a change of scenery can be to one's psyche.

Our goal is to be in by Christmas and out within a few years before we tire of it. I am already looking for another vacant lot for the next home to be built sometime around 2020 or before. A lot of those high end guys are doing the same thing, but on a larger scale. It's like a sport.