Inflationary Illusions in Real Estate (Douglas French)
Thursday January 3rd, 2013
Real estate, and the careers that depend upon it, is a boom-bust business in the age of inflation. The illusion of wealth is everywhere..until it is snatched away.
That’s why it’s a great time for David Mamet’s Pulitzer Prize winning “Glengarry Glen Ross” to make its third appearance on the Broadway stage. It’s a show about Chicago real estate salesmen selling Florida properties through deception and intimidation.
The show appears just as Iowa dirt ascends to new heights, hope springs eternal that home prices have stopped falling, and Bernanke’s tonic is finally putting some sizzle in the home market.
I’m a huge fan of the movie, as those who attended last year’s Vancouver Symposium may have detected. When asked during the Whiskey Bar panel what movie depicted the U.S. economy, I offered up “Glenngary Glen Ross.”
I was sky high with anticipation taking my seat on 4th row. I was not disappointed. Broadway is indeed magic, especially when you can see the shine on the actor’s shoes and spit flies as they say their lines.
Reviewers are carping that the production is nothing but a vehicle for Al Pacino, who plays deluded has-been Shelly Levine. Maybe, but Bobby Cannavale steals the show as Ricky Roma, the role Al Pacino earned an Oscar nomination for in the 1992 movie version.
Cannavale brings more swagger to the Roma role than even Pacino did. He combs his slick Guido-style hairdo using his sun glasses as a vanity mirror. He looks to have stolen his suit, suspenders, white-collared shirts, and argyle socks from Gordon Gecko’s closet.
The audience was on the edge of their seats ready to react to any utterance or facial expression Pacino would produce. Still, his portrayal of ‘The Machine’ did not have the Willie Loman desperation that Jack Lemmon brought to the role on the big screen.
John C. McGinley on the other hand makes for an even angrier Dave Moss than the Ed Harris movie version. If there’s a plot to Glenngary, Moss is its protagonist. It is his desperate plan to do something, rather than just being stuck with the deadbeat sales leads, that puts the Premier Properties office in turmoil and sets up the climax.
Real estate investment is an opportunity. We paraphrase that great investment mind Ricky Roma, the alpha male salesman at the top of his game. Investments can teach a man about himself, as Roma waxes philosophical to the lonely James Lingk. It’s the power of suggestion plying the vulnerable.
In real life today, there is no shortage of vulnerable, especially not in Sioux County, Iowa.
On October 25th in Iowa, no spell was needed to entice buyers of fertile Iowa farmland. No condos or McMansions will sit on this land, only corn or soybeans. Auctioneers took turns taking bids as prices climbed for 80 acres in this heart of corn country. When bidding hit $20,000 per acre, reported an observer, “you could hear a gasp in the room.” Applause broke out when bidding stopped at $21,900.
It’s been awful dry in the midwest, but the land market continues on fire, with prices up over 31 percent in the past five years, according Bloomberg Businessweek. Yep, it’s a no-brainer; income from crops “and the long-term appreciation of the property,” professor Michael Duffy opines.
In a similar way, the Toronto condo market has defied reason and gravity for years, enticing investment from around the world. One reason is that people like Herbert Crockett believe in the old saw, passed on to him by his father: Invest in things you can touch. So Mr. Crockett took the plunge on a Trump Tower Hotel condo for C$904,000.
The “Trump” salesforce told Crockett he would rack up between a 5 and 27 percent annual return from his investment in the big-name project. That sure beats the 2.25% regulated rate banks are paying in Crockett’s home in France. “We bought into the Trump name and what we were being told was a hot real estate market in Toronto for this kind of project,” Crockett told Bloomberg in an interview. “It turns out that the hotel had nothing to do with him and that it isn’t a good investment after all.”
The Toronto market, with more condos under construction than any other city in the world, is now beginning to soften and Mr. Crockett and others that bought are only renting their units a quarter of the time projected. Instead of receiving a monthly check from his investment, the retired HR director is now losing C$7,000 a month according to his lawsuit.
Although the Donald was featured prominently in Trump Tower sales literature, he and his staff were not involved in the development other than selling his famous name to the project and attending the grand opening. An attorney for Trump said, he “was not involved in the sales process and Talon, the developer, made no representations to buyers regarding return on investment.”
But while the Trump legal staff paints the picture that he didn’t have anything to do with Toronto’s tallest building, evidently EVP and daughter Ivanka didn’t get the memo. “We look forward to continuing to achieve great success at Trump International Hotel & Tower Toronto,” she told Bloomberg in an email. “Our team is dedicated to providing world-class service and amenities only found in a Trump Hotel Collection property.”
Great success? Well, yeah. “The hotel is an unbelievable success,” Trump attorney Alan Garten says. Hey, occupancy might not be great. Investors might be losing money. But, the Canadian Automobile Association has awarded the hotel restaurant’s a four diamond rating and TripAdvisor.com rates the Trump Hotel tops in Toronto.
Mr. Crockett has hired lawyers to fix his mistake. In his court filing, Crockett contends he is “the victim of an investment scheme and conspiracy based upon reckless and negligent misrepresentations.”
With the Toronto boom turning into a bust, the advice of Mr. Crockett’s late father is not so sage. It turns out he’s an investing neophyte. “These are not sophisticated investors,” said Javad Heydary, who heads the law firm that is suing the developer and Trump for Crockett and 20 other investors. But the developer’s head man says this is all just a case of “buyer’s remorse” and the plaintiffs just want to get out of their deals.
What were dreams and opportunities in a boom, become in the bust the fraudulent schemes of court filings. The charming and helpful salesmen are suddenly liars and crooks. “There’s the illusion of movement in the Toronto housing sector with sales and buyers,” Crockett told Bloomberg, “But now it seems more like a Ponzi scheme.”
Central bankers can print money and for a while, in some markets of some things, create the illusion of wealth and prosperity. There will always be salesmen around to facilitate the transaction — Glengarry style. But neither the Fed nor the salesmen can stop the busts, the ruined lives, and hard feelings. The money printing and money manipulations — all taking place on a epic scale — only creates more.
Douglas E. French is senior editor of the Laissez Faire Club. He received his master's degree under the direction of Murray N. Rothbard at the University of Nevada, Las Vegas, after many years in the business of banking. He is the author of two books, Early Speculative Bubbles and Increases in the Supply of Money, the first major empirical study of the relationship between early bubbles and the money supply, and Walk Away, a monograph assessing the philosophy and morality of strategic default. He is founder and editor of LibertyWatch magazine. Write him.