Markets:
Golden Age
November 6, 2000
The
real estate markets, particularly residential markets in Greater Boston,
have been remarkably healthy over the past few years. Pessimists among us might say too healthy.
But no one can argue that after the great malaise of the early
1990s an explosion of demand occurred
resulting in a fascinating scramble to create supply.
The result has been an exceptionally positive shift in prices for
an exceedingly time, standing nearly all expectations on their heads. This
shift is particularly true at the higher end of the markets.
Fundamental
changes have scrambled the overall economy and the strong continuing
expansion has created wealth in unexpected places, affecting buying
patterns in many parts of the economy. The changes have had broad
implications on the real estate phenomenon.
Changes
at the high end of the real estate market have been apparent for some
time. Many luxury and resort
markets began to experience counter cyclical activity relatively early in
the current cycle, even as the rest of the market was in "recovery
mode". These markets
presaged a "pulling up" trend that has filtered into most
communities in the Boston Market Area.
The
"pulling up" has created hitherto unheard of price levels for
luxury housing, even in communities with no historical luxury tradition.
As a consequence, long held real estate beliefs have been stood on
their heads. Housing
advocates and community activists decry the trends of "mansionization",
"tear downs" and "trophies".
Many
real estate markets have been subjected to what appears to be unnatural
(and continuing) buying behavior. Clearly,
wealth (or the expectation of greater wealth) allows for greater freedom
of choice. As a consequence, unheard of prices are being paid for
properties located in prime areas. Relatively
pedestrian locations receive unheard of attention. Pieces of land receive multiple offers. Properties sell for more than listing prices.
Brokers are bemused, appraisers are perplexed.
Unusual
buyer and seller behavior in overheated markets is not a new phenomenon.
Nor is it unique to the Boston area.
However, prices that appear to have no firm basis in reality paid
for unusual properties affordable only to a small portion of the buying
public present significant problems to real estate practitioners,
including lenders, brokers, appraisers and other involved professionals.
The
ability to analyze and draw conclusions from markets of any kind is based
on the premise that behavior in these markets is rational.
An analyst may believe that the market behavior of one buyer (or a
limited group of buyers) is not justified by the actions of the larger
group of individuals which defines a market, until such time as there is
sufficient supportive activity to validate the initial individual
activity. As it is often said
that as one sale does not a market make, any rational analyst must take
this premise of rationality as fundamental.
Without it there is no need for analysis or logic and everyone may
do as they please.
We
passed through (hopefully) the peak of a stock market frenzy where, for a
time anyway, all the rules were cast aside.
Net income meant nothing, in fact it became fashionable to value
companies not on revenues at all, but on other more
"sophisticated" indications.
Many of these companies have silently departed or have been quietly
folded into more traditional corporate structures.
The "bottom line" reacquired its importance.
This
is not to say this wonderful era is over.
Something uncommon took place in the economy and has affected real
estate. In the new economy,
many gained wealth quickly: many want the lifestyle benefits from that
wealth. Real estate is but
one, albeit a very central, expression of a successful lifestyle.
The price paid for property may well pale in importance to
acquiring the status or satisfaction associated with the trophy.
Interestingly enough, this holds true also for certain commercial
properties.
There's
nothing wrong with this behavior. However,
professionals must bear in mind that after the party is over, reason and
rationality must rule. The
real estate community can audibly gasp, and perhaps applaud, at bold
purchases that take place. It's
another thing altogether to change real estate basics to accommodate this
one of a kind behavior.
In
the end, professionals do the marketplace a favor by putting these
transactions in perspective. Where
there's price there's not always value.
Visionaries take risks because they can afford to; the discipline
of the marketplace will reward visionaries for bold leaps after, not
before. Validation of a transaction in the marketplace can only be
supported by the weight of other similar transactions.
If
the trend in the market ultimately validates a bold purchase, the dream of
a visionary, then so be it. It's
easy to get caught up in the excitement, it's harder to explain why what
was done was done later. But buyers at this level should take care: reason
returns to markets, often with a clanging
reality.
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