Top Notch Trader looks at Real Estate – and likes what’s happening….

Posted by Dennis Gartman - The Gartman Letter

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Imagine a situation such as this. An individual responds to an advertisement regarding a new, upscale, luxury condominium project that is to be completed in one of the city’s most important neighborhoods, with the price at a seemingly reasonable level. The individual puts 20% down on the project, expecting “delivery” of his new property in a year or so, only to find out that the project has been delayed, and delayed and delayed again. Suddenly the individual in question becomes concerned that the developer may not be able to perform and asks for his deposit back, only to find that the developer has gone out of business, the end result of a severe credit crunch.

Or imagine this: At yet another prime bit of real estate, along one of the city’s most beautiful rivers, a developer offers luxury homes at a truly stunning, shockingly expensive price: $17,000/square metre. The first four or five homes fly off the developer’s drawing boards; the next ten are built on “spec,” but find no buyers. Then the original owners want a discount on their initial price as values plunge 50% or more as the developer begins offering these “spec” homes at massive discounts in order to move them and cut his exposure to his banks.

Or imagine the city’s largest developer…one very well known to the bankers, brokers and wealthy individuals of the city… who suddenly begins offering material 10-20% discounts on his projects when in the past he’d been able to sell them at 10-20% premiums in a frenzied buyer’s market.
Once the best begin to put their real estate projects on offer, the lesser names in the same business have no choice but to follow. In fact they’ve really no choice but to race the “Big Name” down, cutting their offering prices more swiftly than can he. It is a race to the bottom.

Or imagine trying to sell real estate into a market where prices have been falling for the past fifteen months, each month worse than the previous one, and with the speed of the decline increasing rather than waning.

Now, guess which city you’re in? Phoenix? No; it is not Phoenix. Los Angeles? No, again. Las Vegas? Nope… and it’s not Las Vegas either. Atlanta?; No. Sacramento; San Francisco; San Clemente; Laguna? No, No, No and No. We are talking about Shanghai, China. Once perhaps the fastest growing city in the world, with prices going skyward even as home and commercial property prices in the US were plunging, now Shanghai finds its real estate market in turmoil. And that’s the best of the major cities in China. In other major cities such as Chonqquing, and especially Shenzhen, things are much, much worse. In Shanghai, property prices, where reported, are barely higher year-on-year, when “investors” want… and indeed need… prices to rise continually. In Shenzhen, prices are actually down 20% year-on-year, and the trend is so well entrenched that it seems it may be months if not years before prices begin to firm.

The point here is that the real estate contraction going on is not a US problem, but is instead a global one. Dublin’s prices are falling. Paris’ prices are falling; Tokyo’s have been falling for nearly twenty years. London; Moscow; Mumbai… all are falling. We are witnessing the end of the notion that a home is an investment, and we are witnessing it globally. That, we think, is a good thing. Indeed, that we think is a very, very good thing, for to disabuse the global consumer of the notion that a house is an asset rather than a means to keep the rain off will insure eventually that capital leaves housing and goes to equities, goes to commercial real estate, goes into research and development, goes into agricultural land et al. These are assets. These things earn returns; A house? It’s where you sleep, eat and enjoy your family, but it ain’t no investment!

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Mr. Gartman graduated from the University of Akron, in Akron, Ohio in 1972 and went to graduate school at North Carolina State University, 1972-1974.  He worked as an economist for Cotton, Inc. analyzing cotton supply/demand in the US textile industry.  From there, Mr. Gartman went to NCNB where he traded foreign exchange and money market instruments.

In the late 70’s, Mr. Gartman became the Chief Financial Futures Analyst for A.G. Becker & Company in Chicago, Illinois. Mr. Gartman was an independent member of the Chicago Board of Trade, trading in treasury bond, treasury note and GNMA futures contracts. In the mid 80’s, Mr. Gartman moved to Virginia to run the futures brokerage operation for the Virginia National Bank, and in 1987 began producing The Gartman Letter on a full time basis. He continues to do so today.