Michael “Air” Jordan Sees $15 Mil Disappear into Thin Air

In 2012, former Chicago Bull’s star player, Michael “Air” Jordan listed his 56,000 square Chicago mansion for $29 million.  The only problem is that no one showed up to buy it. 

Now, as of a couple of weeks ago, Mr. Air has put the place back on the market at $14.8 million… WHOOSH!  That’s a tidy sum to watch evaporate into think air in just a couple of dozen months.

The 3-story home, which sits on over seven acres in Chicago’s posh Highland Park neighborhood, reportedly has what you might imagine a mega-sports-star would need to be comfortable and raise a family… like an indoor tennis court and an indoor regulation size basketball court with motorized backboards, a pond and putting green, nine bedrooms and 17 bathrooms… a movie theater, poker and cigar room, and a climate controlled garage with parking for 15 cars… plus, an “entertainer’s pavilion” set beneath skylights (whatever the heck that is)… and, you know… all the normal comforts of home that we’d all want our own children to grow up having.

Of course, MJ earned his money… he was a six-time NBA Championship finals MVP… unquestionably among the greatest players to ever play the game of basketball.  I used to love (and hate) watching him play against my hometown Los Angeles Lakers.  And he’s said to have a net worth of $1 billion, so it’s not like he can’t handle the loss in home value.

But, that’s not my point.

The Jordan estate was built in 1995.  It was completely remodeled post-bubble in 2009.  In 2012, it was put up for auction, but not only was the $29 million not offered, but the $13 million reserve price wasn’t met either.  After that, Jordan reduced the home’s asking price to $21 million… and then to $16 million.  And still… no takers.  Now he’s listed it once again for $14.8 and two weeks later it’s still sitting on the market waiting for… I’m not sure who or what to come along.

I don’t know… maybe Ervin “Magic” Johnson or LeBron James is looking for a place in the Windy City.  Whoever eventually buys it, it better be someone who doesn’t mind losing money on real estate because there’s no reason to believe the grotesquely opulent place is going up in value from here… at least not anytime soon… because the fact is, it’s gone nowhere but down in terms of asking price over the last three years.

The question is… what does this mean to the housing market in Chicago or elsewhere?  Does it mean we’re seeing a robust, skyrocketing high-end housing market?  Probably not.  It’s got to mean something less than that, right?   

Since the housing market went into a tailspin in 2008, we’ve seen Nicholas Cage’s Bel Air estate drop in value from $35 million to $10.4 million after foreclosure.  Basketball’s Julius Erving… Dr. J… lost his multi-million estate in Utah to foreclosure, after custom building it in 2006.  Le Reve, a palatial estate in Georgia that was listed for $45 million in 2008 has been reduced in asking price to $18 million… but is still shown as being “bank-owned.”

And that’s not nearly all the stories of extreme home value woe…

In Encinitas, California there’s a 15-bedroom, 16,000 square foot gargantuan Spanish-style residence called Vivienda, supposedly worth $11 million in 2009, before finding its way into foreclosure.  Even at the price of just $2.75 million, no buyers could be found and finally vandals and thieves showed up to turn the place into a ghost mansion of sorts. 

In Tampa, Florida there’s a mega-mansion that was put on the market for $25 million, just four years after being built in 2004, and is still looking for an owner after being reduced by half to $12.9 million.  The 29,000 square foot home was built in the image of the Palace at Versailles and has 10 bedrooms, 10 bathrooms, 14 fireplaces, a grand ballroom, wood paneled library and basketball court.

Why anyone would want to build something in the image of the Palace at Versailles is a bit beyond me.  Perhaps they failed European History in High School because, although the  Château de Versailles was at one time the center of political power in France, soon after it didn’t end well for the royals.  They were forced to return to Paris in October of 1789 after the beginning of the French Revolution, which started The Reign of Terror, signaled the end of monarchies… and started with a financial crisis.

I guess maybe they just really needed a place with a grand ballroom.  I don’t know… our home is only three bedrooms and two baths and I lose my keys from time to time now.  We don’t have a ballroom, grand or otherwise, but when we have a party, most everyone always ends up standing around in the kitchen or sitting on the patio.  I guess these people have friends that gravitate towards hanging out in ballrooms… go figure.

In Vegas, there’s a marble mansion that’s gone from $8.9 million in 2009, to being offered for $1.6 million today.  A waterfront seven bedroom estate in Orlando that was listed for $8.95 million in 2008, today has been reduced to an asking price $2.46 million less.  And according to Forbes Magazine, a 26,000-square-foot English country manor on 300 acres in Virginia, known as Albemarle House, originally listed in 2010 for $100 million, was slashed to $48 million before selling.  (Ouch, that’s gotta sting.)

But wait… isn’t all that behind us?  Hasn’t the housing market “recovered?”

No… it has not “recovered.”

Now, that doesn’t mean that home prices haven’t come back to some degree from their abysmal lows of 2009 and 2010.  Whether they’ve gone up and how much they’ve gone up just depends on to what and when they’re compared.

Consider the macro data… back in the 1970s and 1980s we saw new home sales of roughly 800,000 a year.  From 2000 to 2003… before the housing bubble… new home sales averaged 960,000 annually.

Last year, Bloomberg was predicting new home sales to come in at 430,000, based on a survey of 74 economists, and as of the first eight months of last year there were only 306,000 new homes sold.  So, the fact is that we’re basically selling HALF the number of new homes today than we always have, at least in my adult lifetime. 

Last fall, Robert Denk, a senior economist at the National Association of Home Builders told the Washington Post: “Looking at the larger picture, the numbers are still fairly depressed.  We should be seeing 900,000 new sales or better.”

Of course, new home sales are only a small part of the larger housing market, but they are important to the U.S. economy in terms of job creation in the construction industry, and they are a strong indication of builder confidence about the future demand for homes.  So, while I understand that one reason for a lower number of new home sales is that fewer new homes are being built in the first place, that’s largely because home builders see the overall lack of demand.

In addition, developers continue to struggle when trying to get financing in order before being able to turn over the land to the builders.  According to an analysis by IHS Global Insight…

“Real dollar volumes of loans to real estate developers only just broke a 20-quarter-long streak of year-over-year declines in the second quarter of 2012.”

Take note that the statement above compared the second quarter of 2012 with the second quarter of 2011.  So, in 2012 there was an increase year-over-year for the first time in 20 quarters, but the increase was compared with 2011… not exactly a banner year for the U.S. housing market, as I recall. 

In 2010, for example, new home sales hit a 40-year low according to the Commerce Department… the lowest level since 1963.  And let’s not forget that we have 131,690,000 million more people in this country today than we did in ’63, using data from Demographics of the United States on Wikipedia.

In other words, breaking a 20 quarter decline with a stat that showed improvement over the worst housing market any of us has ever seen… well, it isn’t saying all that much… and it’s hardly reason to preach the Gospel of Recovery with such fervor.

The point is the same: In this country today, annual new home sales volume is roughly HALF of what its been on an annual basis for the last 30-40 years.  And last September, according to government data reported by the Washington Post, we had the the lowest inventory of new homes on the market since June 2013… the year before.  As in… it’s not growing or perhaps it’s even shrinking.

Follow the Money

Look, it shouldn’t be too difficult for anyone to see what’s happening and why.  Our housing market today remains largely anemic by any comparison that uses a year before 2007.  That’s just a fact.  It’s math… like, as in counting… nothing to it. 

New home construction is dependent on financing, just as is the rest of the housing market and industry as a whole.  Without residential loans, homes can’t sell in large number.  Well, home builders too, have to be able to get the financing they need for new home construction, and in case you haven’t noticed (LOL), banks aren’t exactly all peaches and honey when it comes to financing anything related to housing… any kind of housing.  And that situation isn’t likely to change in any meaningful way for quite some time.

Yes, I understand that something like half the sales last year were all cash, but that only points to a really small overall housing market.  It’s just like when I recently read Meyers Research founder,  Jeff Meyers, saying on CNN Money that, “in Irvine, California, 80% of sales over the past year were to Chinese buyers.” 

Should I take that to mean that last year there were torrents of Chinese immigrants assailing Southern California’s shores carrying suitcases jam packed with cash looking to buy homes in Irvine?  Or does Meyers’ statement, if true, only portend a housing market of diminutive proportion? 

It should be easy to see that eighty percent of home buyers being of any one ethnicity… just like 50 percent of home buyers paying cash, both tell you that the size of the market is small… even if sales are higher than they were at their trough and sales in your neighborhood indicate rising prices.

Rising prices today are not a function of what one might call “organic demand,” which would push prices higher in a market driven way.  Demand goes up… prices follow.  It’s a law of economics.  But that’s not what’s going on today… demand is not “up” unless compared with the relatively terrible years since the meltdown and resulting financial crisis.

Today, what’s causing prices to rise, or at least appear that way, is a lack of supply… scarcity, would be another way of putting it.  Inventories of homes for sale are historically very low.  That’s been true since 2008 and it’s not a state of affairs capable of changing quickly or soon.

Mike Simonsen from Altos Research said it very well during the summer of 2012, and it’s just as true today as it was then…

“This low inventory, coupled with rising demand, is pushing home prices upward. Demand isn’t the crazy, influencing factor here. Except for the most-well financed among us, it’s still not easy to get a loan. There’s plenty of economy weakness out there. So in the spring and summer of 2012, the housing market strength is a supply-side function.”

A supply side function, meaning that prices appear to be rising because there are so few homes available on the market, but not because there are so many people shopping for homes, yet another fact pointing to our ongoing relatively small housing market.

It’s the money, remember…

It’s not a surprise, right?  To say that loans are not easy to get these days is the understatement of the decade.  Fewer credit worthy borrowers mean fewer loans… which means both fewer homeowners listing homes and fewer people to buy them.  That situation might make prices appear higher, but it’s not signs of any significant recovery in our housing market.

In addition, to say that inflation hasn’t significantly raised our costs of living is to say that you haven’t driven anywhere lately or visited a grocery store, for that matter.  The Fed continues to love touting our low “core” inflation rate but the way they calculate the rate has changed and is weird.  They eliminate food and gas prices from the calculation, for example… and most of what I buy these days is food and gas.

To say that wages and/or consumer spending have increased is just pure madness, unless you want to compare today with 2010, or some other calamitous year.   And to say that the housing market has recovered… well, that’s just not the case, unless you want to contort the data to make a largely meaningless point. 

We also still have a huge percentage of homeowners “underwater,” or “effectively underwater,” meaning that they can’t sell at a price that would cover sales commissions and provide the downpayment required today when getting a loan.  Many aren’t credit worthy because of financial hardships that occurred when incomes fell and unemployment rose.  And there are quite a few who simply don’t want to move, borrow, or even think about moving or having to move.

If you add those factors together, what percentage of the market do you suppose has left the building, meaning they aren’t going to sell and aren’t going to buy?  Millions are barely hanging on where they are.  Millions are still being lost to foreclosure.  The loan modification process largely remains akin to playing pin-the-tail-on-the-donkey barefoot in the dark with broken glass all over the floor. 

As long as those fundamental factors are true, we will stumble along as best we can with a housing market far smaller than once was the case, and a media intent on cheerleading all along that all is well… and getting um… weller.

It’s actually not even about a “recovery.”

We’re not going to recover to a housing market anything like what it was like in 2005, for example.  If that’s what is meant by recovery, then we are sunk.  That’s not going to happen, not for a long time.

Okay, but just because our housing market isn’t what the media wants you to think it is, doesn’t mean you shouldn’t be in it in some way.  In fact, depending on your circumstance, you probably should.  And now is a perfectly fine time for all sorts of well thought-out things.  Even if loans are painful to get, interest rates are low and it’s not impossible.

A home is still at the top of everyone’s investment list because first it’s where you live and then it’s something growing in value as your equity position improves as payments are made and the home’s value rises over time.  How you treat it… and use it… what you do for it… and what it does for you… should be central to anyone’s life plan.

And understand that I am not a pessimist… not in the least.  In fact, I’m generally optimistic about our housing market’s future.  We’ve got some problems, to be sure… lending being just one of them… but we’ll be fine in the longer run.  If nothing else, eventually we’ll grow our way out.

Mandelman out.