The eToys of the Real Estate Market

I’m not which headline is more interesting:

Oil Profits May Be Peaking

Or

Existing-Home Sales Rise 2.7%, Paced by Demand for Condos. Both appear in today’s WSJ, and both are worth noting—the former because of its potential to be viewed as a wrong-way kind of complacency indicator; the latter because it reveals the seeds of the eventual real estate glut which are now being sown.

I’ll go with the condo story. Here’s a piece of it:

Sales rose for all types of homes in all regions of the U.S., reports the WSJ, but the star performers were condos and cooperatives, where the sales pace has been running twice as fast as for single-family homes.

During the second quarter, condo sales were up about 37% on an annualized basis, compared with 22% for single-family homes. The reason I find this especially interesting is 1) experience, and 2) what I’m hearing lately.

My experience with condominiums is that they are the eToys of the real estate business. You all remember eToys—the online toy merchant that came public in a burst of Amazon.com-initiated enthusiasm…and not too long afterwards hit the trees, as a friend of mine likes to say, with no flaps down.

Like all the other speculative, me-too dot-coms that were dreamed up, funded and brought public in the wake of Amazon’s spectacular success, eToys fulfilled a need: the need for investors who missed the early opportunity to invest with legitimate ground-breaking businesses to buy something—anything—that got them into the game.

And condos are like that, too: when housing gets tight, and real estate gets hot, investors look to condos to make some dough.

After all, they don’t require much effort, given that any condo in any development is pretty much the same as any other condo in that development. The school system, the distance to town, the neighborhood, the yard, the landscaping, the driveway, the roof, the gutters, the shingles, the wiring, the pipes, the basement—none of that stuff particularly matters. After all, you’re not going to own it forever. You might live there a few years until you get enough vig for a real house; more likely you’re going to rent it to out and sell it a few years later to some greater fool. Condos were the last part of the east coast real estate market to spike in the bull market of the mid-to-late 1980’s, and they seemed like such a no-brainer that my church bought a condo for an associate minister—the theory being that when the minister moved on, we owned an appreciating asset that could be used to fund great things.

But the condo did not appreciate. It did not even hold its value. And the equity got wiped out about as quickly as eToys stock. We were, it turned out, the greater fools…and when a church loses money, it hurts.

As for what I am hearing right now, let’s go back to that WSJ story:

Condo sales are strong nationwide and have reached frenzied levels in Miami, Las Vegas and San Diego. And that’s interesting because of what I am hearing.

What I am hearing is that housing sales have hit a wall in Vegas, with certain developers offering cars to buyers of newly built McMansions. The reason? There are something like 100 condo projects in Las Vegas, and condo-mania is siphoning the speculative—er, “investment”—buyers out of the housing market.

Hence, a sudden glut of McMansions blooming in the desert.

Whether that glut is real or just a mirage on an otherwise tranquil horizon remains to be proven.

Informed observations are welcome.

Jeff Matthews I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.