Wolf Richter: Hamptons Super-Luxury Homes Whacked by Reversing “Wealth Effect”

Yves here. Is this softness as the high end of Hamptons real estate collateral damage from hedge fund closures? From today’s Financial Times:

More hedge funds closed their doors in 2015 than at any time since the financial crisis, according to new research, as turbulent markets dragged down the industry’s performance.

Last year was the worst year for liquidations since 2009, with 979 funds closing, up from 864 in 2014, according to data from Hedge Fund Research. The fourth quarter of 2015 also saw the fewest new hedge funds starting up since 2009, with just 183 openings compared with 269 in the third quarter.

The figures capture a period in which many of the industry’s marquee names suffered significant losses. The HFRI Fund Weighted Composite index fell 0.9 per cent last year, HFR data show.

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street

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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  1. ke

    Wall Street is like, hs, teenagers on steroids. You are talking about a new economy, and all economies in the universe work like an elevator, and are geared together at quantum levels with dynamic braking.

    The vast majority, whether it cares to know or not, is reacting to the price of oil, which a 7 yr old reading about photosynthesis can see is stupid, willfully ignorant. In the human economy, only a tiny fraction looks for what is unseen, which is how DNA works.

    Assuming you actually do want to provide for the majority, which can only reside on the counterweight, you have to look at government for what it is, not what you want it to be. Silly Valley is on the counterweight, making it more efficient, by throwing people off, people using its technology.

  2. sd

    I take comfort in knowing that sooner or later, those Hampton estates will just get chopped up and turned into condos. A bunch will get torn down. Others will wash into the ocean with the rising seas. A small handful will get preserved and turned into museums for tours. And no one will remember the names of the current occupants.

    The comedy just writes itself.

  3. MJ

    Being a typical New Yorker with no hope of ever participating in this segment of the residential property market, I recently found my 3-story, glass enclosed dream home (completely unattainable) on 13th Street for $25 million only. However, they just lowered the price to $20 million! Still eternally out of my reach.

    Now that property markets in NY and the Hamptons have been entirely restructured to service the extremely limited group of buyers at the upper left reaches of the demand curve, I’m convinced reports like these from Wolf Richter are not only lagging indicators of hedge funds closing shops but that actors with privileged information about the status of interconnected financial markets are starting to reveal what is kept away from the general population. My sense is the mega rich do not typically make high-end purchase decisions based on whether a hedge fund closes shop or bonuses came in at 5% less than normal (if I had that much money I sure as hell would not care). I would wager that they lean towards these types of property market decisions (these are not year round homes) when they begin to see the horse manure moving significantly closer to the fan. Just speculating here.

  4. susan the other

    The fall in prices by 20% probably indicates a 20% decrease in Chinese money laundering.

  5. Thomas Dority

    Well it’s just an asset bought, most likely, in cash…. so, since it does not bleed a monthly vig on a mortgage so hold em or fold em – depending on where the loss takes place – could be just the thing for an enjoyable summer retreat.

  6. Sam Adams

    I’m old enough to remember when 3 guys could afford to rent the whole summer in the hamptons for a few grand.

    1. jared

      And I’m old enough to remember — just barely — when you could BUY a big chunk of the Hamptons for several grand. Of course, that’s when it was mostly farmers and fishermen out there.

  7. Jesper

    How is the cashflow nowadays for these people?
    Low interest rates and maybe dividends drying up so to keep the ‘operating’ cost (cashflow) of the life-style then a sale of capital might be needed -> pushing down the prices of capital investments?
    Not sure how the sovereign wealth funds of the oil states are doing either, the low price of oil might force some to sell off capital-investments to meet the cash-requirements of lifestyle and population?

  8. Dikaios Logos

    I live in somewhat less plutocrat filled metro area than NYC, DC. I’ve noticed that our higher-end homes, those over $5 million seem to be sitting longer and taking much more in the way of discounts from list price. I can’t explain the phenomenon, but there does seem to be a reversal of dynamics.

  9. craazyman

    Only 1.12 million? That’s an asteroid strike. Wow. Alll this waiting for a 10 bagger. All this patience reading macroeccoommic articles day after day after day after day after day after day after day after day after day.

    finally it’s paid off.

    Just one more 10 bagger and it’s gonna be “Whoa. Sexx on the beach in the Hamptooooons.” Only 1.12 million. it’s within reach. even without a job. even just laying around waiting for the surf to raise up over 4 feet to make it worth paddling out. Then sex on the beach. Well, that could get you arrested if you’re not careful. Maybe sex in the 1.12 million dollar house. or maybe not. Maybe take the 1.12 million and go for another 10 bagger. Why settle for a shack in the Hamptons when something livable, maybe with 100 acres and a helipad, awaits for only a small increase in price, somewhere in the Carribean?

    IT’s 10 bagger time, that’s for sure. The one thing I’ve realized is it doesn’t matter if you read the economic articles on the internet or not. Al that matters is somebody’s willing to give you the money! After they do, you start charging them for losing it. hahahaha. You lose it after you read all the economic articles, not before! Before you wouldn’t have even thought about getting rich. you’d have done something else, like surfed.

  10. keith

    How much longer can we carry on believing in the weird science?

    Neo-Liberal Economics – The Weird Science

    In 2008 the world economy suffered the biggest economic shock known in the history of mankind; the weird science attributed it to a mythical creature “the black swan”.

    In times past we used to attribute eclipses to mythical creatures swallowing the sun, but real science has move on.

    The weird science governing the global economy has been trying unconventional solutions since 2008 to try and get things back on track. When the problem was caused by a mythical creature, “the black swan”, these are the only solutions available. These unconventional solutions, or “stabs in the dark” as they are technically known within the weird science, are not having a great deal of success.

    The Neo-Liberal, “weird science”, has been rolled out across the world and it is the only version of economics now taught in Universities around the world.

    No economic history is now taught so the students don’t see different ways of thinking and don’t question Neo-Liberal economics.

    Neo-Liberal economics is right and should not be questioned within any mainstream institutions.
    Students must concentrate on building complex mathematical models on the base of the Neo-Liberal, economic model, it is right and cannot be questioned. The only way is up, building on these foundations.

    To believe in Neo-Liberal economics you have to believe in the mythical creature, “the black swan”, which explains the major events that occur outside of your belief set.

    Neo-Liberal economics it’s weird science.

    For devotees of Neo-Liberal economics, “the weird science”, prepare for a shock.

    Some economic history outside the carefully selected version you have been bought up on.

    Malthus and Ricardo never saw those at the bottom rising out of a bare subsistence living. This was the way it had always been and always would be, the benefits of the system only accrue to those at the top.

    The benefits of the industrial revolution did accrue to those at the top in 19th Century England and they were fabulously wealthy. Those at the bottom lived a life of bare subsistence, though now through meagre wages rather than what they produced themselves.

    It took the ideas of Marx, and collective labour movements, to prise some of the benefits away from those at the top to those at the bottom. Though those at the top were still fabulously wealthy and those at the bottom lived a miserable existence but slightly better than it had been.

    By the 1920s, mass production techniques had improved to such an extent that relatively wealthy consumers were required to purchase all the output the system could produce and extensive advertising was required to manufacture demand for the chronic over-supply the Capitalist system could produce.

    A system bringing prosperity to all was now in place and relatively wealthy consumers were required to keep the profits flowing to the top in ever larger quantities.

    Adam Smith

    “The Labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full fruits of his own labours; there are no landlords, no usurers and no tax gatherers.”

    Like most classical economists he differentiated between “earned” and “unearned” wealth and noted
    how the wealthy maintained themselves in idleness and luxury via “unearned”, rentier income from their land and capital.

    We can no longer see the difference between the productive side of the economy and the unproductive, parasitic, rentier side. This is probably why inequality is rising so fast, the mechanisms by which the system looks after those at the top are now hidden from us.

    All rentier activity is detrimental to the productive parts of the economy, siphoning off prospective purchasing power to those that like to sit on their behinds.

    If we were still able to recognise the difference between “earned and” “unearned” wealth we might realise that encouraging rising prices of stuff that exists already is not very productive, e.g. housing booms.

    Same houses, higher prices, higher mortgages and rents, less purchasing power.

    As the rentier economy booms, rents and interest repayments on debt escalate and purchasing power goes down leading to the current debt, deflation.

    1. keith

      Outside of the mainstream, Neo-Liberal, “weird science” devotees are there economists that don’t rely on mythical “black swans” to explain things?

      It is time to look for those that know what they are doing.

      In 2005, Steve Keen, saw the crisis coming and the private debt bubble inflating.

      In 2007, Ben Bernanke, could see no problems ahead.

      We know Central Banks were using fundamentally flawed economics prior to 2008 and have not put forward any reasons why they didn’t see 2008 coming, apart from the mythical “black swans”.

      It should hardly be surprising that their fundamentally flawed economics does not come up with the right solutions.

      Steve Keen is a man that can see what Alan Greenspan, Ben Bernanke and Janet Yellen can’t:


      He is an economist that does take debt, the true nature of money and banks into account in his models and he is way ahead of the Neo-Liberal, Central Bankers.

      The IMF and Central Bank models always show things will be better next year.

      When they have missed the cause of the problem, this is inevitable.

      Private debt has swamped the world and the repayments are sapping global demand.

      Since 2008 nothing has been done to address the problem of private debt.

      Eight years have been wasted through the flawed Neo-Liberal, economic models of the technocrat elite.

      1. Keith

        Just to clarify there are two species of black swan:

        1) The real black swan – lives on lakes and rivers and does not interfere with the global economy

        2) The mythical black swan – causes major shocks to the global economy not seen by the complex mathematical models of Neo-Liberal economics

        1. Keith

          How many mythical creatures are used to explain events in the real sciences like physics, chemistry and biology?


        2. Crazy Horse

          Could Trump be a black swan with an orange wig? An entirely new species that has emerged from the New York swamps? Highly unlikely, but I say bring it on!

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