Inside America's Billionaire Housing Boom
Follow CommentsFollowing CommentsUnfollow Commen Stocks have been sliding. Goldbugs are reeling. China’s growth is slowing. Speculation is flying that France and Germany may face credit downgrades. And the hefty offshore accounts of rich investors, particularly Russians, face seizure in Cyprus as bailout looms.
But one market continues to thrive on the steadfast barrage of economic uncertainty: luxury housing.
“The U.S. is just coming out of a housing downturn and it’s become a global safe haven for investors,” says Jonathan Miller, chief executive of Miller Samuel, a New York-based real estate appraisal firm. “But this time it’s not carpenters and nurses quitting their jobs to become mom-and-pop investors; it’s billionaires looking to sink money into unique properties.”
Miller believes these unique properties have become a “new global currency,” as investors view prime trophy real estate as a safe, relatively low-risk place to park cash that hedges against inflation while diversifying an investment portfolio. Couple that with historic home price drops and the waning value of the greenback, and U.S. luxury homes present a compelling buying opportunity to investors from abroad. “I have heard these homes referred to as the most expensive safety deposit boxes,” muses Miller. And there’s something to the concept.
Take One57 in Manhattan. The up-and-coming 90-story glass high rise, which will boast views of Central Park, has experienced a flurry of multimillion-dollar sales activity, particularly among foreign investors from Russia, South Korea, and China. Just recently, a Chinese mother plunked down $6.5 million on a condo there for her daughter, for when she attends an American university. The daughter is two years old.
Across the park, inside the famously elite limestone building known as 15 Central Park West, a Russian billionaire heiress plunked down $88 million on the lower penthouse, last year. Amid messy allegations that the purchase was actually a front for her divorcing father, Dmitry Rybolovlev, to stash cash, the apartment is rumored to be scantly furnished and rarely used.
“We have seen a lot of negative sentiment in emerging markets that is definitely driving interest toward our hard assets that are easy to sell, the easiest of which is real estate in the best locations in the country,” explains Edward Mermelstein, a real estate attorney with Rheem Bell & Mermelstein who has handled sales for many high profile Eastern Europeans. “If you’re presenting an easy investment to a foreigner hailing from a difficult economic situation, what’s easier than an apartment overlooking Central Park?”
Russians and Chinese enjoy attention for their big-ticket purchases but Mermelstein says investors are now coming from other countries too. “Malaysians, Singaporeans, and Koreans are calling on a regular basis and these were not the typical calls coming in a few weeks ago,” he says, noting that recent inquiries haven’t simply centered around real estate investment but increasingly around visa and immigration status as well – a sign that some of these newer buyers are looking to relocate their families as political uncertainties like tensions on the Korean Peninsula mount. Inventory that has been the most in-demand among his international clients: homes priced $5 million and higher.
“All of my clients call it a hedge against every other market,” says Mauricio Umansky, co-founder and chief executive of The Agency, a Los Angeles area luxury real estate firm. “They see real estate as a hedge against inflation, against the commodities markets, and a safe haven from international political risk.”
The properties posing the most promise among safe-haven investors: highly unique, irreplaceable structures (whether due to construction costs or building regulations) on coveted swaths of land in desirable internationally recognized locales like New York, Miami, San Francisco, and Los Angeles. In high-rise-centric Manhattan, the most sought-after properties are prized condominiums touting enviable views of Central Park from massive mansion-like layouts in ultra exclusive buildings with world famous addresses.
In Los Angeles, it’s all about the land. A parcel of flat acreage (a rarity in the hilly city) inside a gated community like Beverly Park is especially coveted. Beverly Hills and second home markets like Malibu, where an oceanfront compound recently commanded $75 million from a Russian couple (who reportedly paid using briefcases filled with cash), have been the hottest targets of wealthy investors. For some buyers, particularly Asian buyers, branded projects like the Ritz Carlton Residences at LA Live have been alluring for the sense of stability a global brand name elicits.
“People have wanted to take as much money out of their countries as possible so they look to buy mega mansions,” explains Umansky, adding that currency exchange rates coupled with the fact that quality inventory is at an all-time low have fueled a significant number of high-end purchases. Buyers hail from China, Russia, and, increasingly, thanks to massive tax hikes, France and Italy. “I know people who are coming out here and buying real estate, telling me they are planning to move out three years from now.”
Further north, Silicon Valley experiences similar behavior. “The two major buyers within Silicon Valley right now are international buyers, generally investors of trophy homes, and young tech looking to diversify their portfolios” says Ken Deleon of Deleon Realty, a Silicon Valley-based luxury realty firm.
Deleon, who spent two weeks in China recently, says 15% of his clientele hail directly from there, while another 35-40% are first generation Chinese. These investors have increased activity due to caps on homeownership in communist-run China and fears of eminent domain. A growing number of Indians and Russians have jumped into the market as well. “They feel that Palo Alto is a safe place to put their money with good upside potential, but more importantly as a means of diversifying funds abroad.”
The same, he says, is true of his domestic tech clients, many of which are early employees of Google and LinkedIn. “They have $50 to $100 million in equities and then they put another $10 million into a luxury home… because they still view the stock market as volatile and real estate is a good diversity hedge for them.”
Palo Alto median home prices have risen 12% since the start of the year thanks to record low inventory levels and outrageous bidding wars that have erupted over what is available. Interestingly, Chinese buyers have been a huge driving force behind the price battles, comprising about one-third of all winning offers. “They are here one week, view 10 homes and put an immediate cash offer, non-contingent, in on their favorite. They want to win that one and a $100,000 to $200,000 counter offer will not get in their way.” Of the most interest to foreign buyers looking to invest: multimillion dollar condos in new buildings that will sit there uninhabited, save for the occasional visit, once or twice a year.
In 2011 Russian billionaire Yuri Milner sunk $100 million into a 25,545 square foot Los Altos Hills mansion, breaking national sales records. When the venture capitalist, who resides primarily in Moscow, purchased the secondary home he reportedly had no immediate plans to move in; last summer, as the Santa Clara County tax assessor’s office slapped a fair market value on the home of $50.3 million or 50% less than Milner’s purchase price, rumors surfaced that he still hadn’t occupied it.
In November another Silicon Valley home fetched an even higher, even more astounding sum of $117.5 million. This time from an Asian billionaire: the nine-acre Woodside estate was reportedly snapped up by Japan’s second richest man, Masayoshi Son. Like Milner’s conquest, the price trumped market comparables, for example the nearby 92-acre Flood Estate listed for $85 million.
“People today are looking at the unique properties as they would a piece of art, fine jewelry or another collectible item,” notes Ron Shuffield, president of EWM Realty International, a Miami-based luxury real estate affiliate of Christie’s. It’s a sentiment that has been echoed by luxury real estate experts in major cities across the U.S. and the world, for that matter.
Another market that has been flooded with high-end investment activity is indeed Miami. The South Florida city has been an urban safe haven from international political instability for decades, but recently, it has welcomed an unprecedented surge in buyers of super luxury homes. Foreigners account for more than 60% of luxury property sales, most notably from Brazil, Venezuela, Argentina, Mexico, Russia, and Europe. These buyers sink money into waterfront mansions on elite islands like Indian Creek or newly constructed condo penthouses on South Beach.
Since late the second half of 2011, Miami real estate has clocked one record-breaking sale after another, including an Indian Creek compound that fetched $47 million from a Russian billionaire in what, to date, remains county’s most expensive home sale. Luxury activity has become so great in the area that the Shuffield’s firm alone is averaging one $1 million-plus sale per day. And like Palo Alto, an increasing number of rich Americans have jumped into the ultra luxury market with similar investing goals, particularly Northeasterners lured by the lack of state income tax.
Deleon, Shuffield and others say the record prices need to be understood on a global level. Buyers, they explain, aren’t house hunting using local market comparables. Rather, they’re shelling out large unprecedented sums based on price per square foot comparisons to other trophy homes located in other major cities around the world. And when they do that, prices stateside seem, surprisingly, like a billionaire’s bargain. “When you start comparing prices in Miami to London, Paris, Hong Kong, New York and Beverly Hills, our prices are so low,” says Shuffield. Seconds Deleon: “Compared to Seoul, Tokyo, Shanghai, our prices are cheap. That will be the new frame of perspective.”
Capturing a real-estate video he narrates in Chinese, Joseph Ho compares a room’s hand-painted ceiling to something that might be seen in Las Vegas. “That's an easy reference point for (millionaires in China),” he said, “because they know Vegas.”
China’s wealthy paying cash for Eastside luxury homes
Eastside real-estate brokers say they’ve noticed a wave of affluent mainland-Chinese buyers for luxury homes in Medina, Clyde Hill and other millionaire rows in West Bellevue. Data and public records show they’re right. It’s part of a cash-buyer phenomenon sweeping the home market.
Real estate agent Joseph Ho climbed the
gilded staircase of a Hunts Point mansion listed for almost $5 million, shooting video on
his iPad and narrating in Chinese.
Buyers from China have inquired about the 5,540-square-foot house. Ho made sure to capture a blue-sky fresco in the formal dining room — “It’ll remind them of Caesar’s Palace in Las Vegas” — and a yacht-ready dock on Cozy Cove.
“Water features are important for Chinese feng shui,” Ho said. “When you have 1.4 billion Chinese, many of whom are millionaires, somebody will like it.”
China’s superrich, who have historically been drawn to San Francisco, Los Angeles and Vancouver, B.C., are investing in Seattle-area real estate in growing numbers, buying multimillion-dollar homes, rent-producing properties and land for commercial development.
In the process, they are accelerating the real-estate market’s recovery, sometimes edging out other buyers with all-cash offers, and deepening ties between Seattle and China.
While exact numbers are hard to obtain, local real-estate agents, bankers and China experts say there’s been a definite increase over the past year of rich Chinese nationals shopping for homes here, mostly on the Eastside.
Citi Private Bank, for instance, reports it’s seen about a 30 percent increase over the past 12 months in the volume of mortgages involving buyers from Asia in the Seattle area.
The buyers have several motives: Some want a safe place to invest and diversify their fortunes. Others want their children to start school or university studies here. And some want to launch businesses here.
There are at least a few who are buying property without setting foot on it.
“We’ve had several projects come in here where the person purchasing from China bought it without ever seeing the property,” said Robert Grumbach, who oversees development for the city of Medina, home to Microsoft Chairman Bill Gates.
One of Ho’s clients in China bought a Hunts Point mansion last year for almost $7 million — and decided to tear it down to build a new home. The client, who thought he could get it built in three months, was shocked to learn it would take two to three years.
Though some may buy based on just a video, Ho says, it’s more common for the rich buyer from China to hop on a plane to Seattle as part of a U.S. tour.
The buyers have cash to spend and are eager to close a deal.
“They want to negotiate, but if you don’t engage, they’re gone” to San Francisco, Malibu or other West Coast cities, he said.
up to Seattle
While San Francisco has long been a destination for Chinese investors, tourists and students, Seattle’s star has been rising.
The Chinese began paying more attention after President Hu Jintao visited in 2006 as part of his first state visit to the United States, said Mark Wen, president of the Washington State China Chamber of Commerce.
Direct flight service starting in 2008 made traveling from China quicker.
And then former Washington Gov. Gary Locke, the first Chinese-American U.S. governor, became the first Chinese-American to serve as U.S. Commerce Secretary in 2009. Locke became Ambassador to China in 2011.
In addition, a recent Chinese romantic comedy, “Finding Mr. Right” — or titled “Beijing Meets Seattle” in Chinese — is giving Seattle a media splash in China.
“We’re not the end of the Earth anymore,” said Joe Borich, president of the Washington State China Relations Council.
Circumstances in China also are driving wealthy Chinese to look abroad.
“It’s only natural that they want to be part of a better environment — clean water, clean air, less density of people,” said attorney Leo Peng, who manages the Beijing office of law firm Garvey Schubert Barer.
Moreover, investment opportunities in China are limited. Some wealthy families also may want to protect their assets by stashing some abroad.
“This is pretty much identical to what happened to Vancouver (British Columbia) in 1997,” Wen said. That year, the British transferred control of capitalistic Hong Kong to communist China. “Vancouver became a haven for people moving money out of Hong Kong.”
Two other recent trends contributed to the current wave of superrich China buyers coming to the U.S.: The rise of China’s currency against the U.S. dollar and the run-up in China’s property values that made many millionaires, said Tom Chang, who oversees the Pacific Northwest for California-based East-West Bank, the largest Chinese-American bank in the United States.
In 2011, China had more than 1.4 million millionaires, ranking it third globally, and 648 households with more than $100 million in wealth, according to a study by Boston Consulting Group.
Some of these Chinese investors are obtaining investor visas from Canada and the United States that allow them to move their families here in exchange for investing in job-creating projects. In 2012, about 80 percent of such investor visas issued by the U.S. government were to Chinese nationals.
To be sure, buyers from around the globe are shopping for homes in the U.S. market: International sales totaled $82.5 billion in 2012, up from $66.4 billion in 2011 and $53.4 billion the year before that, according to the National Association of Realtors.
of a trend
In King County, a Seattle Times analysis of property-tax payers with foreign billing addresses found the largest number are from Canada, China (including Hong Kong) and Japan.
That analysis, covering property-tax records from 2013 and 2007, vastly understates the true number of international buyers because it doesn’t capture foreign buyers who have moved here temporarily for work or education, or those who rely on local property managers to handle their tax payments.
But the data offer one way of seeing the rising interest:
• There are at least 519 owners with Canadian mailing addresses, up 14 percent from 2007.
While the number of Hong Kong addresses rose 25 percent from 2007 to 50, the
number from mainland China doubled to 18, the analysis found.
Recent real-estate transactions are another
window into the phenomenon.
At the Olive 8 condominium tower in downtown Seattle, several buyers are from China, according to the developer’s spokeswoman.
On Mercer Island, former SuperSonics basketball player Kevin Durant sold his home in February for more than $2.4 million in cash to a Chinese-American couple and a Chinese national who plans to visit occasionally, according to their agent, Marguerite Knutson, a Windermere broker in Seattle.
Knutson spent two months going to open houses on the Eastside before closing that deal. Time after time, she said, homes were snapped up by Chinese investors paying all cash.
One rambler in Newport Hills, for which she was the selling agent, was listed at $440,000 and got 11 offers, ultimately selling for $500,000 in cash to a buyer from China.
Knutson said that for would-be buyers who require a mortgage, “it’s tough to compete against people with a bag of cash.”
But for sellers, the demand from investor buyers from China should be welcome; Knutson estimates it is responsible for “at least half of the recovery in prices on the Eastside.”
The buyers of Durant’s house are partners with another Chinese national in building a 400-bed student dorm at Shoreline Community College, Knutson said. They plan to break ground next year.
Other local real-estate agents also say they’ve noticed the surge in interest from foreign buyers.
“We’ve had buyers out of China, South America, Europe and Canada,” said Dean Jones, owner of Realogics Sotheby’s International Realty in Seattle.
“Now that the tides have turned, they’re coming off the sidelines,” he said, “at a time with historically low inventory.”
Chang, the East-West banker, said some of the Canadian buyers here are Chinese nationals who got visas to Canada but decided Vancouver’s real-estate market was too pricey.
“We did two seminars (last summer) for tourists, Canadian Chinese, who came down to look at real estate as an alternative investment,” Chang said. The prospective buyers toured condos in downtown Bellevue and million-dollar homes around that city.
International buyers who want to buy homes in the U.S. market can have trouble getting loans from U.S. banks, experts say, because of cultural barriers and not having an established credit history here.
Complicating matters, China restricts individuals from taking more than $50,000 out of the country per year.
Citi Private Bank has helped Asian clients buy real estate in their own name or through a foreign corporation or through a trust, said Ida Liu, who oversees the Asian Clients Group in North America.
“Our team in Asia can underwrite the mortgage for a house in the U.S.,” she said. “It’s really seamless.”
Peng, who lived in Seattle and now practices law in Beijing, said some of the affluent Chinese nationals buying houses in the U.S. made their money in real estate and intend to develop apartments, offices and shopping malls here.
“This is just the beginning of a huge wave of investment,” he said.
Seattle Times computer-assisted reporting specialist Justin Mayo contributed to this report.
Sanjay Bhatt: 206-464-3103 or firstname.lastname@example.org On Twitter @sbhatt
Russian Billionaires Buy U.S. Mansions
By John Gittelsohn & Oshrat Carmiel - Aug 3, 2011
The transaction made Tariko the neighbor of another wealthy Russian with a taste for Florida luxury living. Vladislav Doronin, chairman of Moscow-based real estate developer Capital Group, paid $16 million in 2009 for the Star Island home previously owned by Shaquille O’Neal, the now-retired professional basketball player.
“In Russia, it’s a status thing now,” Jorge Uribe, a real estate agent with One Sotheby’s International Realty Inc. in Coral Gables, Florida, said in a telephone interview. “If you’re wealthy and you say you have a place in Miami, it’s like saying back in the old days, ‘I own a place in Ibiza or Monaco.’It’s a cocktail conversation thing.”
International investors are buying some of the priciest homes in America as the broader housing market slumps and a weak dollar makes U.S. property more of a bargain. Sales of residences above $20 million are rising in New York, California and Florida, which are popular business and vacation destinations for foreigners, according to Miller Samuel Inc.,DataQuick and real estate brokers who cater to luxury buyers.
More than two-thirds of the nation’s residences with asking prices of at least $20 million were in those three states, said Rick Goodwin, publisher of Unique Homes magazine in Princeton, New Jersey, which releases an annual list of luxury homes on the market each March.
Seven homes have sold in Manhattan for more than $20 million in the first six months of this year, up from five in the same period of 2010, data from New York-based appraiser Miller Samuel show. The median price of those transactions was $27.5 million, up 15 percent from the year-earlier period. The deals included a $48 million sale to Russian composer Igor Krutoy that set a record for a condominium in the city.
In Los Angeles County, 42 houses were listed for more than $20 million earlier this year, Goodwin said. Six properties sold above that level through June, compared with four in the first half of 2010, according to DataQuick, a real estate data service based in San Diego. Thirteen changed hands in all of last year, up from seven in 2009.
The DataQuick tally for 2011 didn’t include the priciest mansion sold in Southern California this year. In July, British heiress Petra Ecclestone paid $85 million for the late television producer Aaron Spelling’s Holmby Hills estate.
Brokers with Sotheby’s International Realty Affiliates LLC sold about two dozen U.S. homes priced at more than $20 million in the first six months of this year, said Philip White, president and chief operating officer of the unit of Parsippany, New Jersey-based Realogy Corp. As many as 25 percent of those transactions were to international buyers, he said.
“We’re hopeful the second half of the year will be as good as the first in terms of the very high-end market,” he said in a telephone interview.
International buyers purchased an estimated $82 billion worth of U.S. homes in the 12 months ended March 31, a 24 percent increase from the year-earlier period, the National Association of Realtors reported May 18.
The precise number of foreign deals for U.S. luxury properties is difficult to calculate because many purchasers are registered as trusts or limited liability companies. Jed Smith, managing director of quantitative research for the National Association of Realtors, said the number of overseas buyers for multimillion-dollar homes is increasing, helped by the rise of emerging markets such as Russia, Brazil, China and India.
“There’s substantial growing wealth overseas,” Smith said in a telephone interview from Washington. “Just go to the Forbes list of billionaires and see that we’re no longer the only folks on it.”
Of the 214 newcomers to Forbes magazine’s annual global ranking of billionaires this year, 54 were from China and 31 from Russia. The Asia-Pacific region had more billionaires than Europe for the first time in more than 10 years and gained the most of any region, with 105 additions, according to the list. Moscow displaced New York as the city with the greatest number of billionaires with 79, compared with New York’s 58.
The Forbes list was topped for a second year by Mexico’s Carlos Slim, who in July 2010 bought a Manhattan townhouse known as the Duke Semans mansion for $44 million.
Foreign buyers are also turning to resort locales such as the ski area of Aspen, Colorado, said Tim Estin, a broker at Mason Morse Real Estate in the town.
“It’s a pre-eminent international mountain resort brand,”Estin said of Aspen, where luxury properties are selling at discounts of as much as 30 percent from the peak.
In the last three years, Aspen had at least five deals above $10 million in which the purchaser was from Russia, according to Craig Morris, president of the town’s Morris & Fyrwald Sotheby’s International Realty.
“Four years ago we didn’t have any Russian buyers,” he said.
In Miami Beach, Tariko’s home is the city’s only sale exceeding $20 million since three lots sold on Star Island for $27 million in April 2006, said Ron Shuffield, president of Esslinger Wooten Maxwell Inc., a real estate brokerage based in Coral Gables, Florida.
The 15,000-square-foot (1,400-square-meter) mansion at 13 Star Island has nine bedrooms, nine full bathrooms and three half-baths, said Shuffield, citing tax records. The driveway is lined with palm trees and the home has views of downtown Miami across Biscayne Bay.
Tariko declined to comment on his purchase, his assistant, Tatiana Kapusta, said in an e-mail.
The seller of the property, Thomas H. Morgan, declined to discuss details of the transaction. Morgan, the founder of Morgan Energy Corp., a closely held oil and gas exploration company based in Englewood, Colorado, said it’s no surprise that foreigners are stepping up to buy while Americans hold back.
“Americans don’t want to put down 80 percent or pay cash,” Morgan said in a telephone interview. “A lot of Americans are tapped out.”
Morgan, who said his “hobby” is building trophy homes, constructed the Star Island mansion in 2003.
New York and Los Angeles were near the bottom of a list measuring luxury real estate price appreciation in 15 cities that attract “the world’s global elite,” ahead of only Moscow, according to a June 4 report by Knight Frank LLP, a London-based property consulting firm. In the year through March 31, prices rose 1 percent in Manhattan and fell 2.2 percent in Los Angeles. Prices in Paris increased the most, with a 22 percent gain, followed by Hong Kong, Helsinki, Shanghai and Beijing.
The firm defines luxury as the top 5 percent to 10 percent of the market in each city.
“Compared to other markets around the western world, the U.S., including New York and Los Angeles, lost significant value during the crash and are more fairly priced,” Liam Bailey, the head of residential research at Knight Frank in London, said in an e-mail. “There is no doubt a surge in interest in New York, particularly for people looking for deals.”
U.S. home prices in 20 cities are 32 percent below their peak in July 2006, according to the S&P/Case-Shiller index. While luxury values haven’t been hit as hard, the sellers don’t always get what they want. The Spelling home in Los Angeles was on the market for two years at $150 million before selling at a 43 percent discount. The Miami Beach estate bought by Tariko fetched 20 percent less than its $32 million list price.
A weakening U.S. currency helps make the nation’s homes seem like a good deal, said White, the Sotheby’s president. The dollar has fallen against each of the 16 most-traded currencies in the past year, according to data compiled by Bloomberg.
Among emerging-market currencies, the Russian ruble increased 7.7 percent against the dollar in the 12 months through yesterday. The Brazilian real advanced 12 percent, while the Chinese yuan gained 5.2 percent.
For Russians, interest in luxury properties is as much evidence of conspicuous consumption as it is efforts to capture bargains, said Edward Mermelstein, a real estate attorney Rheem Bell & Mermelstein LLP with offices in New York and Moscow.
“Those trophies, they’re buying them to make a splash,”Mermelstein said in a telephone interview from New York.“They’ll definitely gravitate to a property that’s higher profile as much as to a property with a long-term investment potential.”
Yuri Milner, founder of Moscow-based DST, which invests in Internet companies including Facebook Inc., Twitter Inc. and Groupon Inc., paid $100 million for a 25,500-square-foot mansion in Los Altos Hills, California, according to property records. The transaction is the biggest for a U.S. single-family home sale this year.
Milner’s spokesman, Leonid Solovyov, declined to comment on the purchase because it is private.
In Manhattan, Krutoy and his wife, Olga, bought their 6,000-square-foot condo at the Plaza hotel in March. The deal came six months after the couple completed the purchase of a $12.85 million home in Long Island’s beach area of the Hamptons.
The Krutoys razed the Southampton mansion and are building a new house at the site on Gin Lane, where neighbors have included designer Vera Wang, shopping-mall magnate Alfred Taubman and New York Times publisher Arthur Sulzberger.
“He was looking at Gin Lane because that’s what he knows - - it’s the Fifth Avenue of the Hamptons,” said Susan Breitenbach, a senior vice president at Corcoran Group, the Krutoys’ broker for the sale, one of five deals she handled this year involving Russian buyers. “That’s what they really wanted and that’s what they stuck with.”
Krutoy bought the Manhattan property because he was seeking a home in the city, rather than looking to take advantage of a bargain, said Ilya Bykov, principal at Protax Services Inc., a New York-based firm that provides legal, tax and property-management services for international clients. Bykov represented Krutoy in his search, negotiation and closing for the Plaza apartment, and helped provide legal representation for the Hamptons home.
Russian buyers “have the money and they always want the best in everything,” Bykov said of the people he represents.“Most of these people are buying pied-a-terres and it’s quite common that the person would buy a luxury apartment in New York and a condo or penthouse in Miami.”
Kirk Henckels, director of the private brokerage at New York’s Stribling & Associates, said he was approached by a would-be buyer from Russia seeking to spend $100 million on a Manhattan home.
“I said, ‘We don’t have properties that high,’” Henckels said in an interview.
The most expensive single residential property currently for sale in Manhattan is the Woolworth Mansion, a 1916 “neo-French Renaissance” edifice on East 80th Street. The sellers are asking $90 million, according to StreetEasy.com, a real estate listings website.
Buyers from Russia and China have expressed interest in the seven-floor mansion, said Paula Del Nunzio, the broker with Brown Harris Stevens who is listing the property.
The newest Manhattan condo building to catch the attention of foreign buyers is a 90-story tower under construction on West 57th Street by Extell Development Co., according to Mermelstein and Bykov. The property, known as One57, will be the tallest residential tower in New York when completed in 2013.
The 95-unit building will record “a number of signed contracts” in the next 30 days for units ranging from $7 million to “north of” $40 million, Gary Barnett, Extell’s president, said in a telephone interview. He declined to say where the buyers are from, but said inquiries have come in from overseas, including Russia.
Among the contracts to be signed in the next month is one for a full-floor, 6,200-square-foot unit that offers panoramic views of Manhattan, including Central Park, Barnett said.
“Three-hundred-sixty-degree views, unobstructed. That’s something special,” Barnett said. “If you were worth $100 million dollars or you were a billionaire, this is something unusual. If you can afford the best of the best, why shouldn’t you do that?”
In the Los Angeles area, about 75 percent of the people looking at “super luxury homes” for $20 million or more are from countries such as China, Indonesia, Korea and Russia, said Sally Forster Jones, a Beverly Hills broker. Forster Jones plans an October trip to China to seek potential customers, she said.
Asian clients prefer Bel Air, Beverly Hills and Holmby Hills, known as the Platinum Triangle of Los Angeles, with their palm-tree shaded boulevards and history as home to Hollywood celebrities, Forster Jones said.
“They prefer the West Coast, because it’s much easier for the Asian buyers to get to,” she said. “There’s a lot of glitz, a lot of glamour, a lot to do.”
Europeans also like Los Angeles mansions, said Forster Jones, who shared the listing of Spelling’s 56,000-square-foot estate. The buyer is the daughter of British billionaire Bernie Ecclestone, the president and chief executive officer of London-based Formula One Management Ltd.
Russians are among the best customers for luxury homes in the Los Angeles area, said Jeff Hyland, president Hilton & Hyland Real Estate Inc. in Beverly Hills, who shared the Spelling mansion listing with his partner, Rick Hilton, and Forster Jones.
One example is the 2010 purchase and resale this year of a $19.5 million mansion by Dasha Zhukova, art collector and partner of Chelsea soccer club owner Roman Abramovich, said Hyland, who wasn’t involved in those transactions.
“You have the new wave of the oligarchs with their big yachts they dock off the beach at Malibu when they’re here,” he said in a telephone interview. “It’s all about the weather here. It’s about the ease with which people can move back and forth in Los Angeles. They can get in their Ferrari or their Rolls Royce Ghost and drive where they want without need of security.”
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“The largest transfer of wealth from the public to private sector is
about to begin. The federal government will be bulk-selling the massive
portfolio of foreclosed homes now owned by HUD, Fannie Mae and Freddie Mac to
private investors — vulture funds.”
So warned Roger Arnold, chief economist for ALM Advisors of Pasadena, California, in a column for RealMoney on August 11, 2011, that first lifted the lid on this latest colossal scandal to come out of the 2008-2009 financial crisis.
“These homes,” wrote Arnold, “which are now the property of the U.S. government, the U.S. taxpayer, U.S. citizens collectively, are going to be sold to private investor conglomerates at extraordinarily large discounts to real value. You and I will not be allowed to participate. These investors will come from the private-equity and hedge-fund community, Goldman Sachs (GS) and its derivatives, as well as foreign sovereign wealth funds that can bring a billion dollars or more to each transaction.”
Warren Buffett, one of the richest men in the world, obviously, would have no trouble qualifying for the privilege of bidding in this fire sale for the super-rich. And the “Oracle of Omaha” appears to be more than casually interested in getting in on the game.
The Wall Street Journal reported on March 20, 2012: “Warren Buffett, considered a sage investor and chief executive of Berkshire Hathaway Inc., said in an interview with CNBC-TV last month that he would buy up ‘a couple hundred thousand’ single-family homes if he could do so easily, given the high yields on rental investments.”
A couple hundred thousand homes for Buffett? What about the hundreds of thousands of families who are being foreclosed on? Isn’t that what the Fed, Treasury, the Bush White House, and members of Congress told us the $750 billion TARP (Troubled Asset Relief Program) fund was for when they forced it on us in 2008? What about the additional hundreds of thousands of families who would love to be able to purchase these homes and who may be qualified to buy under a genuine privatization program open to all? What about the hundreds of thousands of small investors who are willing to buy, rehabilitate, and rent out these properties? Well, the folks running Fannie, Freddie, and HUD haven’t completely ruled out the little guys; they are continuing to sell a portion of their mammoth inventory of foreclosed homes the traditional way, one-by-one to individual buyers. But over the past year, they have been moving into bulk sales and have been getting ready to unload their portfolios en masse at huge discounts to the big buyers.
Who are some of the other high-rollers lining up for the restricted Fannie/Freddie/HUD fire sale? According to the Wall Street Journal, they include Lewis Ranieri, regarded as “the godfather” of mortgage finance for developing mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs), the financial weapons of mass destruction that played a key role in the economic meltdown.
Another, says the Journal, is hedge fund titan Paulson & Co., headed by John Paulson.
Forbes magazine, which in 2012 listed Paulson as #61 among the world’s billionaires and #17 among the “Forbes 400,” says that he “became a billionaire in 2007 by shorting subprime securities, earning a $3.5 billion payout.” What Forbes doesn’t mention in its flattering profile is that Paulson, like Ranieri, was a major architect of the house of cards built on CMOs and other fraudulent debt instruments — euphemistically called “synthetic derivatives” — that Paulson marketed through Goldman Sachs.
And, of course, the power brokers at Goldman Sachs, JPMorganChase, and Citigroup, who have already reaped billions of taxpayer and investor dollars from the financial havoc they helped cause — as well as from the bailouts that followed — are salivating at the thought of even greater lucre to be made in the newly created homes-for-rent market.
“Economists at Goldman Sachs estimate the annual yield on an investment on rental property nationwide averages about 6.3%, but can exceed 8% in cities that were hit hard during the housing bust, including Las Vegas, Detroit and Tampa,” notes the Journal. “By contrast, mortgage bonds have average yields of just over 3%, and investment-grade corporate bonds are yielding about 3.5%, according the Barclays Capital U.S. Investment-Grade Index.”
Incredibly, the malefactors who invented the toxic mortgage securities and raked in massive wealth by marketing those fraudulent products with a “pump-and-dump” strategy that fleeced millions of savers, investors, and homeowners are now planning to use their ill-gotten gains to once again make a killing. And, once again, this is only possible because the Federal Reserve has instituted a corrupt system of cronyism that amounts to legalized theft on a titanic scale.
These privileged mega-investors could “instantaneously become the largest improved real estate owners and landlords in the world,” notes Roger Arnold. “The U.S. taxpayer will get pennies on the dollar for these homes and then be allowed to rent them back at market rates.”
The Fed’s REO Speedwagon
The REO program to pulverize Main Street for the benefit of Wall Street would go nowhere without approval from Chairman Ben Bernanke and his fellow governors at the Federal Reserve. On April 5, 2012, the Fed issued a policy statement loosening regulations so that “banking organizations may choose to make greater use of rental activities in their disposition strategies.” This will make it easier for banks — including those that received billions of taxpayer dollars — to hold REOs off the market as rentals for 10 years, or longer. This was a follow-on to the Fed’s white paper on housing issued by Bernanke on January 4, 2012, that painted a dire picture of the real estate market and expressed the need to look at new options.
The paper, entitled The U.S. Housing Market: Current Conditions and Policy Considerations, declares: “Looking forward, continued weakness in the housing market poses a significant barrier to a more vigorous economic recovery.”
The Fed’s white paper notes:
At the same time that housing demand has weakened, the number of homes for sale is elevated relative to historical norms, due in large part to the swollen inventory of homes held by banks, guarantors, and servicers after completion of foreclosure proceedings. These properties are often called real estate owned, or REO, properties.... Perhaps one-fourth of the 2 million vacant homes for sale in the second quarter of 2011 were REO properties. The combination of weak demand and elevated supply has put substantial downward pressure on house prices, and the continued flow of new REO properties — perhaps as high as 1 million properties per year in 2012 and 2013 — will continue to weigh on house prices for some time.
Additionally, it points out that “currently, about 12 million homeowners
are underwater on their mortgages — more than one out of five homes with a
mortgage.” Presumably, many of these will also end up in foreclosure.
But Bernanke and his Fed brethren, naturally, have a solution. They claim “a government-facilitated REO-to-rental program has the potential to help the housing market and improve loss recoveries on REO portfolios.”
But, to add audacity on top of audacity, the Fedmeisters hint that besides favoring a closed privatization scheme that turns over an REO bonanza to their cronies (who have already benefited immensely from the Fed’s crooked largess), they may also be setting the program up for us, the taxpayers, to help finance the deals for the billionaire investors! The Fed white paper informs Congress that “providing investors with debt financing will likely also affect the prices they offer on bulk pools of REO properties.”
“Subsidized financing provided by the REO holder may increase the sales price of properties,” the Fed advises, appearing to suggest that it would be to the benefit of all concerned if the taxpayers sweetened the saccharin deal even further.
President Obama, who likes to inveigh against Wall Street (while taking record sums of Wall Street cash as campaign contributions), is on board with the plan. “The Obama administration, in conjunction with federal regulators and led by the overseer of Fannie Mae and Freddie Mac, are very close to announcing a pilot program to sell government-owned foreclosures in bulk to investors as rentals, according to administration officials,” Diana Olick reported for CNBC on January 9, 2012, in a piece entitled “White House wants to convert foreclosed houses to rentals.”
“A pilot sales program will be starting in the very near future, according to administration officials,” Olick reported. “They are working on what the market potential is, what pricing would be, how government can partner with private investors, and who has the operational experience to manage so many properties.”
RTC Déjà Vu
The federal agency that is handling the disposition of the huge federal REO inventory is the Federal Housing Finance Agency (FHFA), created by the Federal Housing Finance Regulatory Reform Act of 2008 (Public Law 110-289), which was signed on July 30, 2008 by President George W. Bush. The FHFA is “the Resolution Trust all over again — but much bigger,” ALM economist Roger Arnold told The New American. “And you can be sure the corruption will be commensurately bigger.”
For those who recall the massive Savings & Loan crisis and bailout of the 1980s, there is more than a passing resemblance to the current financial crisis and bailouts. And the FHFA does indeed look disturbingly similar to the Resolution Trust Corporation (RTC), created by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (which was signed into law by President George Bush, the elder) to “resolve,” i.e., clean up, the S&L mess.
“The RTC was expected to handle nearly 300,000 properties (many of which had been overvalued to begin with) and $400 billion in failed S&L assets (including loans which were taken out never intending to be paid back),” explains Nick Adama, who has written extensively on the mortgage crisis for the ForeclosureFish blog and website. The RTC compounded the looting that the Fed and the FDIC had encouraged, rewarding the criminal class with a second shot at even juicier profits. Adama elucidates:
While the RTC took over nearly half a trillion dollars in toxic loans,
bad mortgages, junk bonds, unfinished condo and development projects, and
undeveloped land, the program became another excuse for the same people who had
looted the industry to begin with to launder their money back into these same
Criminals who had received huge loans from S&Ls on overvalued properties pocketed the difference, usually with offshore bank accounts that were never confiscated by the government. When the RTC took over the assets of these failed S&Ls, the government wanted to liquidate the assets for whatever it could get.
The looters of the thrifts, then, were able to use the dirty money they had obtained by defaulting on S&L loans to purchase insolvent S&L assets. In fact, the Resolution Trust Corporation did not even ask questions about buyers if cash was offered.
The RTC became, in effect, the federal laundromat for the dirty S&L
money, becoming a partner in crime with some of the century’s biggest thieves,
who had victimized millions of savers and millions more taxpayers. “Clearly,
the RTC was offering a way not only to repatriate their offshore money but to
parlay it into further gain as they bought government-owned assets at bargain
basement prices,” concluded authors Stephen Pizzo, Mary Fricker, and Paul Muolo
in their 1991 book Inside Job: The
Looting of America’s Savings & Loans.
Since September 2008, Fannie and Freddie have operated under the conservatorship of the FHFA, with, as the Fed white paper points out, “specific mandates to minimize losses for taxpayers and to support a stable and liquid mortgage market.”
The FHFA is now the big player in the housing market. The FHFA’s website informs us: “The Federal Housing Finance Agency regulates Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks. These government-sponsored enterprises provide more than $5.7 trillion in funding for the U.S. mortgage markets and financial institutions.”
The California Association of Realtors is vigorously opposing the FHFA/Fannie Mae REO bulk sales, noting that it is unnecessary, since there are plenty of buyers willing to pay market prices, without giving steep, subsidized discounts to the billionaire insiders.
In a letter to California’s congressional delegation dated February 6, 2012, the Realtors’ group said: “Los Angeles and the Southern California region have been named as a potential pilot program location. However, these areas are experiencing an inventory shortage, and many homes for sale, especially distressed properties, are receiving multiple bids. Removing REO inventory through a bulk sale and rental program will hurt these communities. In addition, the taxpayer will lose because these REOs will be sold for less money in bulk sale than if sold as individual units.”
Other industry sources express similar opinions of the market. “A pretty robust cottage industry has developed and is absorbing this at an incredibly fast pace,” Richard Smith, chief executive of Realogy Corp., which owns the Coldwell Banker and Century 21 real-estate brands, told the Wall Street Journal. There doesn’t seem to be any urgent need for FHFA to unload bulk inventory at a huge discount, and doing so is not likely to benefit taxpayers. Fedgov bulk REO sales “will end up being another huge taxpayer-subsidized gift to the vultures, the big inside players who are politically connected,” Roger Arnold told The New American.
In order to play in this game, the investors must agree to hold the REO properties as rental units for a specified period. This will require building or acquiring a management structure to care for the properties. According to investment insiders contacted by The New American, some of the big investors are already partnering up with the HUD Management and Marketing (M&M) contractors that manage the huge Fedgov REO inventory.
In his original August 2011 RealMoney article, Roger Arnold wrote:
These M&M companies are principally owned by and employ former high-ranking government officials from the various germane agencies — the Treasury, HUD, FHA and others. And they will provide the necessary access to the current government employees who are tasked with bringing this program to fruition. Once the privatization is complete, those government employees will move from their positions, and many will take up new employment at one of the M&Ms or the new vulture funds.
The FHFA’s plan for bulk REO sales will open up vast new vistas for
federal officials and bureaucrats to strike special sweetheart deals with Wall
Street partners, with lucrative payoffs as they transition from “public
service” to private-sector management.
Oligarchs and Princelings
Closed “privatization” programs like the REO selloff being pursued by the Fed and FHFA serve to widen the wealth gap by further enriching the already wealthy, while reducing advancement opportunities for the poor and the middle class. They also serve to fuel the fires of resentment toward what is obviously unfair advantage enjoyed by the privileged few.
Unfortunately, all too often the politicians, analysts, and commentators misdiagnose the problem and misdirect popular resentment and outrage toward the wrong target: “capitalism,” “deregulation,” or “free market economics.” However, the culprit here isn’t free markets, it’s corporatist socialism, which is politicized crony capitalism. With the ongoing series of federal bailouts since the financial crisis of 2007-2008, the U.S. Treasury, the Federal Reserve, and the federal regulatory leviathan have taken control of virtually our entire national economy. As a result, we are more and more coming to resemble the centrally planned, centrally controlled political-economic systems in place in Russia and China. Our ruling classes are also looking more and more like the Politburto plutocrats in Moscow and Beijing.
The big news in Forbes magazine’s 2011 annual survey of “The World’s Billionaires” was the striking increase in billionaires in Russia and China. The magazine reported that Moscow had become the city with the most billionaires, 79, followed by New York, with 58. It also reported that China had nearly doubled its number of mega-rich citizens over the previous year, now claiming 115 slots in the billionaire category. The number of super-wealthy Russians had jumped two-thirds during the same period, to 101 billionaires.
Although these recently minted billionaires are usually called capitalists, they have not earned their sudden wealth through entrepreneurial skill and free enterprise; they have amassed their enormous riches thanks to their Communist Party connections (in China) or “former” Communist Party connections (in Russia), which gave them special privileges in the “privatization” of previously nationalized resources. Russia’s super-wealthy oligarchs profiled by Forbes — Alisher Usmanov (steel, telecom, investments), Vladimir Lisin (steel and transport), Alexei Mordashov (steel), Vladimir Potanin (metals, media), Vagit Alekperov (oil), Mikhail Fridman (banking, oil, telecom), Mikhail Prokhorov (metals, energy, investments), Roman Abramovich (steel, investments), et al. — are all tied in to Vladimir Putin’s KGB-run Kremlin power structure.
Likewise, China’s economic emperors and princelings — Li Ka Shing (shipping, ports, real estate, technology), Robin Li (technology), Liang Wengen (manufacturing), Zong Qinghou (beverages), He Xiangjian (manufacturing), Hui Ka Yan (real estate), Liu Yongxing (agribusiness) — have been hugely enriched not through the power of the market, but through the power of the state. The economic systems in Moscow and Beijing are frequently (and absurdly) referred to as capitalist or “market-oriented,” but they are “capitalist” only if understood as being state capitalist or gangster capitalist, where rewards are dispensed through political power rather than through consumer choice.
The Federal Reserve System is one of the principal political instruments being used to transform the American system into a replica of the regimes in Russia and China. This is not surprising when one considers that the Fed comes close to fulfilling the requirement for a central bank demanded by Karl Marx and Frederick Engels in the Manifesto of the Communist Party. The fifth plank of their 10-plank program called for “centralization of credit in the hands of the state, by means of a national bank with State capital and an exclusive monopoly.”
And what has the Fed’s “centralization of credit in the hands of the state” accomplished? We catch a glimpse of the devastation in the partial audit of the Fed last year by the Government Accountability Office (GAO). “As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world,” said Senator Bernie Sanders (I-Vt.) when the first part of the audit came out in July.
The number one recipient of the Fed’s bailouts and loans was Citigroup, which received more than $2.5 trillion! Second was Morgan Stanley, which sucked down more than $2.04 trillion. Third was Merrill Lynch, which took in more than $1.9 trillion. Then Bank of America at $1.3+ trillion, Barclays at $868 billion, Bear Stearns with $853 billion, Goldman Sachs at $814 billion, JPMorgan Chase at $391 billion — and on and on. There are many important details about these transactions that we still don’t know because the Fed has refused to reveal them, and Congress has thus far failed to demand the kind of genuine audit that Rep. Ron Paul has been pushing for. Keep in mind we’re talking about multiple trillions that the Fed is creating out of thin air and handing out to its friends — with no checks or accountability. As mind-numbing as the $16 trillion figure is, that may be only a fraction of the abuse, corruption, and thievery that is occurring.
The GAO audit turned up a number of examples of prima facie evidence of conflict of interest in the Fed’s activities vis-à-vis Wall Street insiders, among which were:
• JPMorgan Chase CEO Jamie Dimon served on the board of the Federal Reserve Bank of New York at the same time that his bank received over $390 billion in total emergency loans from the Fed;
• General Electric CEO Jeffrey Immelt served as a director on the board of the Federal Reserve Bank of New York while the Fed provided $16 billion in financing for GE under its emergency lending program;
• New York Fed chairman Stephen Friedman sat on the board of directors of Goldman Sachs and owned Goldman stock while the Fed was shoveling hundreds of billions of dollars into the Wall Street behemoth’s coffers;
• New York Fed president William Dudley was allowed to keep AIG and General Electric stock at the same time that the Fed was showering AIG and GE with hundreds of billions in bailouts.
In a July 2011 press release denouncing the Fed’s corrupt favoritism, Sen. Bernie Sanders declared: “This is a clear case of socialism for the rich, and rugged, you’re-on-your-own individualism for everyone else.” Sanders, the only member of Congress who openly identifies himself as a socialist, was right; the Fed’s program has always been socialism for the rich. However, Sanders, like most other socialists and “progressives,” gets the solution totally wrong: more socialism, more centralization, more government control.
The Federal Reserve needs to be stripped of its power, not handed more power and control. However, the REO bulk privatization that Bernanke and company are now promoting would increase the Fed’s clout while effecting one of the most radical redistributions of wealth in history. Millions of erstwhile homeowners would be reduced to the status of perpetual renters to the Wall Street cronies whom the Fed has already lavished with untold billions and would have become our new landlord class.
* * *
This being an election year, members of Congress are more sensitive and responsive to constituent pushback and feedback. They need to hear loudly and clearly from voters that the FHFA REO “socialism for the rich” program won’t fly. They need to know that the voters are holding them to account to Audit the Fed and End the Fed.