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Be on Guard Against Bubble Sightings

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
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Is there is a “worrisome pileup of $100 million homes,” as a hyperventilating headline in a New York Times article declared last week? The story was accompanied by the usual warnings about bubbles, parallels to the credit crisis and an ominous observation that “the last time a sudden pop in $100 million-plus listings occurred was in 2007 and 2008, just before the housing crash.”

The headline did its job. The column made the rounds on social media, television and blogs. Given all the chatter it generated, it is worth looking at some of the data points to see if we can discern any deeper meaning. 

What's below is more akin to anecdote than data, but here are some numbers the article cites:

  • The world’s most expensive house, a Bel Air, Los Angeles, 74,000-square-foot compound, was listed for $500 million;
  • Pierre Cardin’s 13,000-square-foot Le Palais Bulles (The Bubble Palace) on the French Riviera, is second at $450 million;
  • There are 27 residences listed for sale with asking prices of more than $100 million; Christie’s International Real Estate notes this is a 42 percent rise from last year, and a 125 percent increase from 2014; and
  • Real estate agent chatter -- so-called whisper listings -- suggests there may be more than 50 nine-figure listings.

Let's begin with the obvious: In any real estate transaction a listing price is just a reference point. In the case of high-end real estate it serves other purposes -- it is a marketing ploy, designed to get tongues wagging in the voyeuristic world of ultralux residences.

Inflated outlier prices -- either in total or on a per-square-foot basis -- have very little to do with the real-estate market, and everything to do with real-estate marketing.

As examples, the Times noted that a ranch in Texas was put on the market for $700 million and a home in Dallas listed for $100 million. Although the article said the properties were sold, the final sales prices weren't disclosed.  I have a sneaking suspicion that the sellers got nowhere near those attention-grabbing asking prices.

As residential real-estate expert Jonathan Miller, president of Miller Samuel Inc., observed, “These prices get headlines, but the properties just don’t sell.” And if they do sell, it's usually at a large discount to the listing price.

Why do I say this isn't a reflection on markets but of marketing? Let's consider a few facts. First, you can count on your fingers the number of people who can afford these properties. Second, the universe of people willing to part with that much money is even smaller. Third, deals almost never close for more than $100 million; last year, there were just two confirmed sales in the nine-figure range. One was to Alibaba chief Jack Ma, who dropped $193 million for a house in Hong Kong; the other was an unknown buyer who spent $132 million for a townhouse in London.

There is a temptation to draw some broad, macro-conclusions about the big rise in the number of $100 million-plus listings. But doing so is a mistake. These are one offs -- anyone who buys one of these is spending what amounts to a rounding error. It’s the same as a $30 million dollar Ferrari or a $300 million piece of artwork: It is an extremely small market of a handful of billionaires for whom the price is all but meaningless.

Compare that to the residential real-estate market in which 4 million to 5 million transactions occur each year. This reflects people who saved for a down payment, got approved for a mortgage and negotiated a price based on (among other things) comparable sales and how much they could afford to spend on housing each month. THAT’S what a market is.

In a deep, liquid and broad market, prices contain important information. But what do the spending habits of a few billionaires tell us about the broader real-estate market, or the economy, other than that a few people with incomprehensible amounts of money bought with little regard to price? Let's put it another way: There are something like 100 million residential properties in the U.S. of which only a handful sell for stratospheric figures. The information contained in those few transactions make up a tiny data set, and reading much more beyond that is fraught with potential for error.

But the human impulse to find meaning in randomness is impossible to keep in check. So, inevitably, the article likens the rise in $100 million-plus listings to the warning signs that emerged before the housing crash. And, just as inevitably, someone had to conclude that Pierre Cardin’s Le Palais Bulles being put up for sale is the “ultimate bubble signal.”

I beg to differ. As we have noted before (see this, this, and this) relying on any single factor to predict market behavior is a fool’s errand.

Ever since the financial crisis, there has been an element of post-traumatic stress disorder among both pundits and traders. It is, as I've said before, a backward-looking exercise that leads to a “Bubble in Bubbles.” As a rule of thumb, try to avoid drawing sweeping conclusions from sample sets that are too small to tell us much of anything.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Barry Ritholtz at britholtz3@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net