Time to Short 57th Street?
As a New Yorker, it’s hard to travel through the city these days without coming across construction sheds, scaffolding and giant cranes. New building construction is everywhere and much of it is for residential apartments. Midtown Manhattan and 57th Street in particular, sometimes referred to as “Billionaire’s Row”, seems to be overrun with giant new condo buildings going up (though the construction is hardly limited to that neighborhood). It’s not just my imagination. An astonishing number of super high end apartments are being built – one recent report estimated that 7,000 new apartments will be coming on line in the next two years. Sometimes, this can cause an average New Yorker like myself to get annoyed by the inconvenience of the construction sites, the altering of the city skyline, the rapid and radical changes to neighborhoods or the loss of an old, favorite haunt. It can some cause a person to shake their fists at the sky and ask how much longer can this madness go on? Just how many rich people in the are there in the world who don’t already have giant apartments in the city?
There are some people who are worried that the construction and development of some many high-end homes in New York might be entering a danger zone. There are signs that the pace of expensive condos may be slowing. London, a city similarly blessed with an influx of expensive apartments and the bankers and oligarchs who love them, has recently seen a sharp decline in high end home sales. The fall in the prices of the Ruble and oil may start to make some overseas buyers more reticent. The supply of high end homes may, perhaps, be exceeding demand, for now at least.
One New York City developer recently shared his concern and negative outlook for what he describes as a bubble in high end Manhattan real estate – he said he wished he could short 57th street! In other words, this developer doesn’t see a bright future for high end New York City condos and he thinks there would be more money to make by betting on the prices of these condos falling. Readers may recall that in 2007 a number of hedge fund managers, such as John Paulson and Magnetar, and investment banks, such as Deutsche Bank and Goldman Sachs, made boatloads of money by using Credit Default Swaps to bet that subprime mortgage backed securities would fall in value.
Is this possible? Is there a market for betting on individual apartment buildings or neighborhoods falling in value? Sort of? Yale Professor Robert Shiller helped create something known as the Case Shiller Home Price Futures Exchange, which trades on the CME. This exchange does let a person who might be inclined to make bets on the future price movements of Case Shiller’s national home price index, including either shorting (betting on a decline in price of homes underlying the index) or going long (betting on an increase in the prices of homes underlying the index). However, it is still a relatively new concept and is relatively thinly traded. In any event, the index is based on the home prices of the whole country (or at least the top ten regions of the country), so it really isn’t narrowly focused enough to get at the issue of over-priced billionaire condos in New York.
Alternatively, if you were a billionaire thinking about buying a $20 million pied-à-terre overlooking Central Park but worried that prices might go down, you could just decide not to buy right now. Unfortunately, this might not be very satisfying until condo prices did eventually fall and you got to tell everyone “I told you so.”
Why would someone want to be able to short this segment of the market? Is it just because they’re jealous of the rich and hope that they lose some (paper) wealth? In the stock market, short sellers sometimes get attacked for being bad for the market or harming otherwise nice companies. Defenders of short sellers (and there have been many similar defenses in recent years), however, argue that shorting stocks is good for market liquidity and price discovery. Short sellers expose fraud and correct mis-pricing in the market. Likewise, the hedge fund guys and bankers who shorted the subprime market argued in books like Michael Lewis’s The Big Short that they did provide a service (as well as make themselves wealthy) by helping to expose the shoddy mortgage underwriting practices and national housing bubble that dominated the early 2000s.
If there really is a bubble in multi-million dollar apartments in New York City, would New Yorkers benefit from having the bubble deflated or fraudulent apartment buyers or sellers exposed? Potentially. If this market is a bubble, it may have the effect of driving up land values throughout the neighborhood, or cause landlords to warehouse empty buildings in anticipation of future paydays. Pricking the bubble might prevent the speculative construction of buildings that don’t, subsequently, find enough apartment buyers and then end up in bankruptcy, sitting vacant and neglected for many years. If there really is a bubble, shouldn’t the speculative excesses of the billionaire condo market be exposed to price discovery and negative bets the way the subprime market was back in 2007?
Unfortunately, no such market really exists at this time. Until Professor Shiller decides to narrow his index and futures exchange down to just Manhattan’s 57th Street, or some clever trader comes up with a new way to trade property values, we may be stuck having to wave our fists angrily at the skyscrapers blotting out the sun. But it is interesting to think about.