Stephen Schwarzman: 'Keep away' from real estate

Think I'm going to listen to schwarzman here.

Yeah, well, Schwarzman probably has more closet space than I've got.

I liked this part:

In the meantime, he suggested people turn off their televisions and pull the plug on their computers, saying that media and the Internet have made the crisis worse by giving everyone the same bad news and gossip simultaneously. “The business stories went on to the front page,” he said. “That is never a good thing. Business stories should always be on the business pages.”

In an apparent reference to CNBC, he observed that there isn’t enough news in the day to fill “14 hours of programming,” leading TV personalities to “beat the drum.”

“I’m not bringing a message of complete gloom—the world goes on,” Mr. Schwarzman said. “It just looks terrible.”

In a similar vein, Mr. Schwarzman said that Wall Street firms will continue to contract and even more employees will be sacked, noting there remains %u201Ca surplus of people in a shrinking industry.%u201D

"The glamour and endless upside that young people believed in when entering financial services is going to be compromised," he said, adding that potential reforms in financial regulation "may change the world we've all lived in."

Good thing he doesn't read these message boards.

Not that it matters, but he was referring to "commercial" real estate...

Yes, because those folks who won't need offices to go work in will still be buying apartments...

wheew, we are saved.

Listen to Stephen Schwarzman?
What the hell is he saying that is so extraordinary?
the economy sucks? RE sucks? It's going to take a while to get better?
NO SHIT SHERLOCK!!!
Let's stop confirming the obvious, we have windows at our place also. Allow me to remind you that our son stephen was once (for a brief moment) the 8 Million dollar man. Now Oscar Goldman could kick his ass. Here's a peek at little stephens sucess...
http://finance.yahoo.com/echarts?s=BX#chart3:symbol=bx;range=my;indicator=volume;charttype=ohlc;crosshair=on;ohlcvalues=0;logscale=on

adding fuel to the media fire he lowbrows..sweet irony. he just wants news since his blackstone ipo debacle left him pantless. okay he's still a millionaire, but his ego is still shot.

Sorry to burst your bubbles, but that chart shows that Steve was a genius in this respect.

He made tons of money. Then he sold (much of) his firm to the public... RIGHT before it and the economy tanked.

The public got screwed on that one.... but its their fault. Blackstone did not need capital for expansion... the guy was clearly selling because the money was worth more to him than the company.

Had the stock gone UP after he sold out, then he would have made a mistake.

It looks like Steve walked off with $187 million and has now dropped his income to the absurdly low amount of $350k, to what, avoid the income tax?

If I had that kind of cash, I could be happy in just about any $2 million dollar apartment in the city and never think another moment about whether the value had dropped by 10% or 20% going forward.

Like other people have pointed out, Steve is talking about commercial real estate. Does anybody have any good information about the correlation of commercial real estate and residential real estate?

Although there has been some moderate historical correlation between residential and commercial real estate the relationship has not been nearly as strong as one might have expected. The following is the return for FTSE NAREIT Equity - the leading index of publicly-traded equity real estate in the U.S. I also then show the S&P Case-Shiller Composite Home "Price" Inex (for the U. S.) which is without the implicit rent return component - so it is not a "total return" index.

FTSE NAREIT Equity

89, 8.84%
90, -15.34%
91, 35.72%
92, 14.58%
93, 19.66%
94, 3.17%
95, 15.25%
96, 35.26%
97, 20.29%
98, -17.51%
99, -4.62%
00, 26.36%
01, 13.93%
02, 3.81%
03, 37.14%
04, 31.57%
05, 12.17%
06, 35.03%
07, -15.70
08, -37.74%

Case-Shiller Home Price Composite Index

89, 6.14%
90, -3.61%
91, -1.73%
92, -1.68%
93, -1.29%
94, 1.70%
95, -0.40%
96, 1.87%
97, 5.37%
98, 9.15%
99, 10.80%
00, 14.11%
01, 8.99%
02, 14.97%
03, 13.43%
04, 18.69%
05, 15.93%
06, -0.03%
07, -10.36%
08, -19.54%

(Residential real estate returns would, of course, be significantly higher if one factored in the implicit rental income in their annual returns but this is not done.)

In a statistical sense this works out to a correlation of 0.47 (or an R-squared of 0.22). I note the R-squared figure as in a statistical sense that means that 22% of the return from residential real estate has been attributable to movements in commercial real estate.

In a total portfolio sense, residential real estate has actually been a decent diversifier relative to commercial real estate. (Residential real estate has been a particularly good diversifier versus the S&P 500 with a correlation for the period of 0.20 and an R-squared of 0.04.) As such, home ownership has been a fine diversifier for individuals in a total portfolio sense.

He's probably short RE.

> As such, home ownership has been a fine diversifier for individuals in a total portfolio sense.

Not at all.

1) In many (possibly most) cases, the exposure to the RE market is greater than the total net worth. If I have a $500k net worth and put down $100k on a $1 mil apartment, I still have $1 mil in total exposure to the RE market. Thats not diversification, that is unhealthy concentration.

2) Buying ONE residence in ONE location in ONE market is the worst way to invest in diversified real estate. That isn't diversification, that is the opposite.

3) Owning where you live is simply not an investment.

You make a number of good points, 10022.

However, I would temper your conclusions somewhat (probably no surprise).

I agree that a $1 MM apartment does give you $1 MM exposure - not the indicated $100 K equity exposure. (And your mortgage is effectively a short position in bonds - and quite a huge one at that.) The volatility of that $1 MM "investment," though, has been considerably less than for the S&P 500. For the indicated period the standard deviation of returns for the S&P has been 20.0%. The standard deviation of annual home price returns has been 9.5%.

As of 9/30/09 the average equity in a home in the United States was 45% (down from about 60% in 1990). So people's equity-only position has become considerably more leveraged.

I would also suggest that "total returns" from home ownership have actually been quite attractive over the long term when you include the "implicit rental income" you received tax-free.

Liquidity, of course, is lousey - particularly today. Liquidity in most private equity deals is far worse than for residential real estate, though. And many have been surprised to learn how limited the liquidity of their hedge fund investments are.

For most young people home ownership does represent a very large investment relative to their financial assets. I would, however, note that a young person's biggest real asset is their future earnings power - sometimes referred to as their "intellectual capital." Older people approaching retirement have diminishing future earnings power - or "intellectual capital" - but generally an increasing amount of financial capital.

Your ONE, ONE, ONE comments are largely correct. However, I would note that over a lifetime most people will have owned more than one residence in more than one place which does suggest at least a measure of diversification. Not perfect, it's true.

BTW, one of Shiller's hopes is that people will increasingly use housing futures that trade in Chicago to adjust the total amount of real estate exposure one has - perhaps generally meaning selling exposure in the futures. Those futures aren't perfect either - but they do represent an extraordinary development.

"The volatility of that $1 MM "investment," though, has been considerably less than for the S&P 500. For the indicated period the standard deviation of returns for the S&P has been 20.0%. The standard deviation of annual home price returns has been 9.5%."

1) Not sure what is comforting about a consistent and measured 10% yearly decline. The standard deviation will look awesome, I'm sure, but who cares.

2) YOU HAVE TO MULTIPLY THE VARATIONS BY 10x! You can't leave out the leverage. The standard deviation of a 10x levered investment is SIGNIFICANTLY more than that of the same investment not levered.

> I would also suggest that "total returns" from home ownership have actually been quite attractive
> over the long term when you include the "implicit rental income" you received tax-free.

Only because we're looking at prices after a big bubble.... see how that looks in 5 years....

"For most young people home ownership does represent a very large investment relative to their financial assets. I would, however, note that a young person's biggest real asset is their future earnings power - sometimes referred to as their "intellectual capital." Older people approaching retirement have diminishing future earnings power - or "intellectual capital" - but generally an increasing amount of financial capital."

True... but that doesn't make it any better an investment. The same logic would apply to buying stocks at 10x leverage.

Your points are valid, but they don't seem to actually refute my points. Leveraging into a VERY specific asset that can be several times your net worth is NOT proper diversification.

interesting, second half, quoting Center for Economic and Policy Research, discusses how well real estate has done for the boomers:

http://globaleconomicanalysis.blogspot.com/2009/03/boomers-future-went-down-drain.html

yes, things always do look pretty rosy at the top of the bubble...