Fun in the Sun

Anyone need more evidence that the housing bubble is
approaching the terminal stage?… Property prices along
the New Jersey shore are soaring.

"Home prices along the coast from Sandy Hook to Cape May
have more than doubled since 2000," Bloomberg News reports.
"That compares with a 62 percent increase in the rest of
the state, according to data from the National Association
of Realtors. The rise in prices along the 127-mile (204
kilometer) stretch of Atlantic Ocean is three times as fast
as in the rest of the U.S."

Maybe the Jersey Shore deserves every bit of its resurgent
popularity, but we doubt it. Your editor just returned from
a weekend in Belmar, New Jersey – home of sand and sun and
not much else. He did not visit this oceanfront town to
luxuriate in a 5-star spa. There are none. Nor did he trek
two hours south of Manhattan to dine at one of Belmar’s
renowned seafood restaurants. There are none.

Rather, he ventured to the seaside town to watch the
nation’s finest volleyball players strut their stuff. Every
year about this time, a cadre of young, tan and very fit
athletes descends upon Belmar Beach to compete in a
tournament sponsored by the AVP (Association of Volleyball
Professionals).

The pros in attendance this year included guys like Karch
Kiraly, the volleyball legend who led three different U.S.
men’s indoor team to Olympic gold medals. Karch played
brilliantly all weekend, despite relying upon 44-year old
legs.

Unfortunately for the residents of Belmar, however, the
tournament lasts only three days. The other 362 days of the
year, they must content themselves with whatever delights
the town produces on its own. We would imagine that
tranquility – bordering on ennui – tops the list of
principal off-season attractions.

Belmar is a non-descript strip of sand along the Jersey
Shore, not far from several non-descript strip-malls. Even
on a 90-degree Sunday in early July, the town feels a bit
forlorn. To be sure, one finds blocks and blocks of cute
little cottages clustered along the coastline which,
collectively, create a somewhat charming effect. Not
charming enough, however, to attract hoteliers or
restaurateurs or even the Starbucks Company.

But Belmar’s greatest deficiency is not aesthetic; it is
atmospheric. Belmar is a delightful little strip of
sand…for three months of the year. The rest of the time
it inhabits the same artic climate that the rest of us in
the Northeast endure.

"Why," we griped to a local, "are hotels non-existent in
Belmar?"

"Who’d want to make the investment?" the local replied,
"You’d only have demand for rooms from Memorial Day to
Labor Day?"

At first, the explanation seemed reasonable, as we hopped
into a car and headed inland to a Days Inn in nearby
Neptune, New Jersey. But we immediately recalled that
luxury hotels dot the coastlines of Brittany and Normandy –
– two places where the sun rarely shines, even in summer.
Likewise, hotels operate in the Hamptons and in Cape Cod
and in many, many other seasonal locales. But not in
Belmar. In other words, seasonality, alone, does not
explain the dearth of accommodations. However, a lack of
off-season allure might.

But even if hotel operators shy away from the Jersey Shore,
real estate speculators do not. "Baby boomers returning to
the New Jersey beaches this summer in search of childhood
memories," Bloomberg News relates, "are discovering
something else: surging real estate prices…The median
sales price of an existing single-family home in the
Atlantic City region rose 23 percent to $217,400 in the
first quarter of 2005 from a year earlier, and 20 percent
to $358,500 in Monmouth and Ocean counties, according to
data compiled by the National Association of Realtors.

John Swanick, a partner at a Philadelphia-area accounting
firm, is one of the real estate min-tycoons who is
contributing to the boom. "After vacationing in Sea Isle
City as a child," Bloomberg notes, "he bought a place in
1992. Swanick, 44, currently owns three properties in town
and said he may buy one more in the next few weeks. He
estimates the four-bedroom townhouse he bought in January
2001 for $485,000 is now worth $1.3 million."

"People are realizing that real estate is a smart
investment to make, a safe investment," beams Bonnie
Fitzgerald, president-elect of the New Jersey Association
of Realtors. "It’s one of the only investments where you’re
pretty much guaranteed to get a return on your money."

Really? Real estate provides a "guaranteed return?" Even
from highly seasonal vacation properties? The effusive
Fitzgerald might not have ALL the facts at her disposal.
Home prices along the Jersey Shore tumbled about 40%
shortly after the stock market crash of 1987. But why worry
about such disquieting "one-off" events when prices are
still soaring year-after-year?

Real estate – it is no secret – has been a terrific
investment for several years, especially since 2000. It has
been so terrific, in fact, that many investors consider it
a "can’t-lose" proposition, which is often the state of
mind that prevails immediately before a given asset class
is about to become a "can’t-win" proposition.

Like gold in 1979, Japanese stocks in 1989 and U.S. tech
stocks in 1999, real estate seems like the greatest, most
reliable, and safest of all investments on earth. But we
suspect it is somewhat less than that.

While basking in the summertime warmth of continuous
capital appreciation, it is easy to forget that the wintry
chill of softening prices is sure to arrive.

The pleasant days of summer rarely last long, especially in
Belmar, New Jersey.

Still not convinced that real estate is topping out? Check
this out: Public pensions are rushing into real estate the
way they rushed into tech stocks in the late 1990s.

"When the tech boom went bust A few years ago, New Jersey’s
public pension fund was among the hardest hit in the
country, suffering a loss in its tech-laden portfolio of
nearly one-third of its value, or $30 billion. Now the
State Investment Council has another great idea: In January
it decided to jump into – this can’t be a surprise – real
estate."

Within the ranks of "dumb money" public pension plans often
top the list. In 1982, for example, on the eve of an 18-
year bull market in stocks, CalPERS (the massive public
pension plan of California) allocated less than one quarter
of its portfolio to equities. But by 1999, immediately
before the Nasdaq bubble burst, CalPERs’ allocation to
stocks had swelled to nearly 70%.

The giant pension plan may have learned its lesson. "We
think the timing is right [to sell real estate]", says Brad
W. Pacheco, a Calpers spokesman. "We have a property on the
block right now and plan to continue selling." Calpers has
lately sold about $7 billion in expensive real estate and
taken profits.

But few public pension funds are following CalPERs’ lead.

"After getting out of real estate altogether in the late
1990s," Forbes Magazine relates, "the Teacher Retirement
System of Texas has decided to invest up to $2.7 billion,
or 3% of its $90 billion in assets. For the first time the
Arizona and New York City funds are buying up property. All
told, the top 50 public funds increased their commitments
to real estate last year by $9.8 billion, equal to 11% of
their property holdings, according to the newsletter Real
Estate Alert. Now they have set a target of loading another
$34 billion into land and buildings as quickly as is
practical, representing a 37% hike to $128 billion, or 7.2%
of their assets.

"The rush of public money into real estate," Forbes
concludes, "has many signs of the rearview-mirror investing
that cost New Jersey so dearly during the tech bust."

Well said…All else being equal, we’d rather sell to the
nation’s public pension funds than rub shoulders with them.