Distressed Assets: 2010 versus 2020

I am in the middle of a debate with my friend Nir Kaissar about peoples’ consumption habits. My position is as long as you can afford it, well, then go ahead and ignore the spending scolds and other Puritans who want us all to live a chaste life. Buy what you want, preferably experiences over stuff, but the occasional shiny thing can be purchased, too. Just understand human adaptability to these items and the limitations of materialism.

Doing some research for our back & forth, I reread a 2010 discussion about when one should make those big purchases: Counter-Cyclical Spending (during recessions). In the middle of the Great Financial Crisis, a client asked for something that was not “relentlessly negative and utterly depressing.” My suggestion then: “Make a wish list of what you have wanted to own, but were unwilling to pay top dollar for. Could be real estate, art work, collectible autos, jewels, sports franchises. Bid 50% off of the peak market price. Then sit back to see what happens.”

That turned out to be great advice in 2009-10.

Today? It’s a completely different economic atmosphere. The wealthy are having a much easier time this go around than the GFC. That crisis hit the entire country, but it especially depressed the assets owned primarily by the wealthy. Two of the biggest asset classes in America are Equities, which got cut in half (-56%), and are Real Estate, which fell by a third (-33%).

Sure, it took nearly a decade to recover from the 10% unemployment, often with jobs that paid less. But the strongest initial hit — at least before the Fed’s monetary rescue — was to the investor class and the wealthy.

That is not the case with the 2020 pandemic recession/depression. The true U3 Unemployment is ~25% and GDP has fallen between 20% and 30%. The 34% drop in equities has recovered (partially), and prime real estate, especially out of the cities, is now selling at a premium. Anecdote alert: Several people I know are paying quite the markup in the Hamptons for pre-summer rentals; Someone wanted to rent a friend’s “cottage” for the summer for $50,000. I am curious about rental prices for beach summer houses in other parts of the country.

During lockdown, I set little rewards out for myself when a TTD list item gets completed. One such incentive: cruising auction sites, bidding on cars, and hopefully scoring a deal (just sold the ’86 SL). Which leads to an anecdotal observation: The cars that wealthy collectors purchase seem to be maintaining their value: 1969 Ferrari Dino ($390k), 2009 Mercedes-Benz SLR McLaren 722 S Roadster ($725,000), 2017 McLaren 570GT ($135k), and even this 383-Powered 1963 Chevrolet Corvette Coupe ($106k). A 2003 Ferrari 575M Maranello is already bidding over $106k, while this 2015 Ferrari 458 Speciale Aperta sold for $476,000. Those are all in line with prior market prices for those cars.

But the cars that the “not very wealthy enthusiasts” often like seem to be softening by 15-30% or more. This (non-matching numbers) 1968 Chevrolet Corvette Convertible 4-Speed went for $23,500! I am annoyed at missing that great weekend driver. This rare 1939 Buick Roadmaster Phaeton Convertible 81-C went for $34k — about half of what one might have expected. American muscle cars like Mustangs, Chargers, GTOs, Camaros, even BMW M3s/M5s seem to be going for hefty discounts. I am a fan of both the Audi R8 and the AMG GT-R, and would love to see these drop in price to something more affordable — but those are still rich guy toys.

These are only anecdotes, but the plural of anecdote might be data. Some economics grad student should do a deep dive into Bring A Trailer’s database to see what can be learned.

But this is very different than the last few go rounds: After GFC, there were distressed real estate sales in NYC (but it eventually normalized). I hear similar tales of investor groups scoping out distressed prime real estate in the city right now.1 But most of the impact of this pandemic is being felt most intensely by the people with the least savings, the most insecure jobs and residencies, media salaries or less. The bottom 60% of the country by income are the ones who are suffering the most.

Live in a big house away from population concentrations? WFH in a service job? You will be just fine. Have a frontline job? You are literally risking your life and the lives of your families, for $12 / hour — not a great risk/reward ratio.

The very significant difference between this crisis and the last one is that as a group, the rich are feeling much less pain than those who are not rich.

 

 

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1. My pal Jonathan Miller notes: The rental market in Hamptons was a function of panic as the virus hit – not a value add for prime properties that will be sustained

 

 

 

Previously:
Counter-Cyclical Spending during recessions (March 17, 2010)

The Plural of Anecdote IS Data (February 4, 2019)

 

See also:

Death of a Dynasty (*2010)

 

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