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How The ‘Wealth Effect’ Could Now Shift Into Reverse

This is a syndicated repost courtesy of The Felder Report. To view original, click here. Reposted with permission.

A couple of weeks ago I wrote a post asking, “is this the real estate ‘echo bubble’?” Today, it looks like this potential ‘echo bubble’ may be in the slow-motion process of popping.

High-end real estate in the Bay Area is starting to show real signs of weakness.

This is mainly due to the fact that the startup boom, which created a massive wealth effect in the area, looks to be in the process of peaking and rolling over. Many large investors have been writing down the value of their startup investments for months now and new investment in the space is drying up. It only makes sense, then, that real estate prices, which benefitted from the boom, would now begin to suffer accordingly.

At the same time we are now seeing weakness in another ultra-high-end market. The most expensive segment of homes in the Hamptons is seeing pressure on prices as sales begin to slow and inventories rise.

Similar to the slowdown in Silicon Valley, the weakness in the Hamptons can largely be attributed to the slowdown on Wall Street. Trading revenue in the first quarter has been disappointing, negative interest rates around the world pose a unique challenge to banks, and hedge funds are finding it very difficult to profit in the current environment. All of this adds up to pressure on prices of the most valuable homes in the Hamptons.

I should also note that all of this fits with what we have recently heard from some other companies serving the ultra-wealthy like Sotheby’s. The auction house has seen a dramatic slow down in business recently with at least one large buyer becoming a forced seller.

And If the Fed’s efforts in recent years were primarily focused on creating a, “wealth effect,” to stimulate the economy, they should be increasingly concerned now to see these growing signs of a reverse, “wealth effect.” Because if the economy does operate from the top down, as this theory proposes, these could be very important leading indicators.

Wall Street Examiner Disclosure: Lee Adler, The Wall Street Examiner reposts third party content with the permission of the publisher. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler, unless authored by me, under my byline. I curate posts here on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. Some of the content includes the original publisher's promotional messages. No endorsement of such content is either expressed or implied by posting the content. All items published here are matters of information and opinion, and are neither intended as, nor should you construe it as, individual investment advice. Do your own due diligence when considering the offerings of information providers, or considering any investment.

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