Tuesday, May 26, 2009

Bling Bling and Luxury Homes

You know the recession is for realzz when rappers have been forced to cut back on their purchases of bling (or “bling bling” if you prefer.) According to the WSJ, a brutal combination of a deepening recession coupled with plummeting music sales have forced aspiring hip-hop moguls to downsize from diamond encrusted baubles to faux-ice. Celebrity jewelers say that rappers are asking them to make medallions with less precious stones and metals and even requesting cubic-zirconia, the diamond substitute. This has given rap luminaries, such as 50 Cent, more ammunition to call out his musical adversaries for not wearing the real deal. This is a great way to get the old hip-hop rivalry going again as rappers seemed to have run out of good things to fight about. If anything is going to stop the downward spiral in music sales, it’s a good feud. And verbal sparring over the authenticity of their bling seems like a much safer way to establish street cred than say bustin a cap in another rapper’s ass (okay, I admit, I’m an old school rap fan and am about 20 years out of date with the lingo.)

While flashy customized pieces of jewelry may seem like a safe investment for a rapper, when times are no longer flush, the secondary market is apparently not particularly liquid. The WSJ article references the cancelation of a planned charity auction where rappers were set to auction off pieces of bling that they no longer needed. The auction was eventually canceled due to lack of interest. While these rappers were selling jewelry for charity, the cancelled event spells doom for any rapper actually hoping to generate cash to pay bills by selling the family jewels.

Speaking of illiquid assets like customized rapper-flavored bling, Barron’s had a front page story on the luxury second-home market. Barron’s assertion was that the secondary luxury home market was off around 30%, and while it may fall another 5% or so “professionals” claimed that the bottom was near and that if you were in the market, you should pounce now or risk missing out when the market “snaps back.” Among the “professionals” that Barron’s quoted in the article were no less than two real estate brokers, both of whom were looking to sell secondary homes due presumably to some belt-tightening. What amused me about the article was how it continued to reference 2007 as the year from which to judge how much the market had changed, as if 2007 was some sort of real barometer and not a complete aberration. While a 30% discount to 2007 peak prices might sound cheap to some, it still seems ridiculous to use 2007, which was the peak in an overblown housing bubble. You know what? Cisco is still 65% off of its 2000 peak price. Does that make it a cheap stock, or a stock that was just overvalued in 2000? Furthermore, the stock market is down 40% from its 2007 peak and it is liquid. Anything illiquid, such as art, luxury homes, rapper’s bling is down considerably more. Why? Because the liquidity premium has grown wider as financing for many assets has dried up. My guess is that the secondary luxury home market is down significantly more than 30% and that the only houses that are off 30% are the ones that are actually changing hands. The article mentions that inventories have grown substantially and very little is actually trading. How much is your high-end luxury house really worth if you can’t get a single bid? Luxury homes are nowhere near a bottom. It is the foreclosed homes that are changing hands briskly in places like Southern California that are near a bottom. If you’re shopping for a second home, keep your powder dry and wait for the real discounts. Trust me, they're on the way.

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