Charles Paulos, A Wealth Management Advisor and Senior Vice President at Merrill Lynch, is in his 26th year with the firm. He was kind enough to give Hamptons.com an exclusive Hamptons economic forecast interview. Mr. Paulos has a home in Montauk but resides in Manhattan. He is an avid golfer, skier, bike rider and once was President of the New York Athletic Club Runner’s Club where he also served on the N.Y.A.C. Board of Governors.
He started the interview by explaining his thoughts about the old east end saying, “As goes Wall Street goes the Hamptons and its real estate market.” About this Mr. Paulos said, “I think it’s still prevalent today but more so years ago because the primary industry in New York City was always finance…it is still the greatest money generator. The difference between years ago and today is we are seeing the largest transformation of wealth in the history of the world and it will continue for several years.”
He believes that is because the baby boomers are getting money from their parents. Mr. Paulos drew from personal experiences saying, “We see it, some clients give each of their children $60,000 a year – others even much more. In the Hamptons you are beginning to see more people flying in from other parts of the country on their private jets, but New York still is financial central.”
When looking at the economic situation today he said, “To me it’s textbook economics, rising interest rates are going to slow down demand. What we saw this summer with inflation was different from other times. The economy opened up in February. Everyone was coming out of Covid jail at the same time. It was like everyone wanted to travel, whether it be car travel or air travel. There was lots of immediate purchase power from accrued savings due to stay at home working, eating and entertaining.”
“The Federal Reserve folks,” he added, “can affect supply but they can’t affect demand. A year ago, in the Hamptons if you put a house up for sale in one day you would get ten offers and that was not normal. Normal is you put your house on the market and it takes a few months to sell. We need to get back to normal. I believe we are going to have a healthy housing market because we are still undersupplied by a few million homes. The 2008 housing bubble mowed down neighborhoods out west and homebuilders did not build for a long time. There was a lag.”
Paulos believes presently the price of lumber is back at pre-Covid rates, but with the rise of interest rates the homebuilders are submitting fewer applications to build homes. He said, “That strengthens and stabilizes the price and values of existing homes. There will not be a major housing correction like 2008.” Paulos continued, “Back then homes went down 50%, but for some homes now to go down 10 to 20% is healthy and necessary. We need that to happen.”
About owning real estate versus renting in the present situation, he said this, “ A year ago people were buying things and they only went up. If you want to own a home for a long-term investment to live in and over time build equity and get price appreciation over time, you buy. If not, you should rent. Right now, you might see more people choose renting because of the high prices of buying. It is going to take a while for real estate to get to where it needs to moderate to help the first-time homeowners who are not using the profits from one home sale to fund the next home purchase.”
He said, “Right now the question to own or rent comes down to what you can afford. First time buyers should not overpay right now, they should wait at least six months until prices come down. However, home prices are not going to come down 50%, more like 10-20%.”
He explained, “In the Hamptons many people bought houses to rent. There is something called the Housing Affordability Index. If you are super-wealthy, you can go out and buy something huge for cash. When you buy a house so that you can rent the house, then it has another value. Therefore, if you are not renting that home like many folks experienced this last summer, then you didn’t get an income. That affected the plan on using that income to support the cost of the rental home.” Then Mr. Paulos concluded, “Therefore, with interest rates rising people are going to sit back on purchasing homes in the Hamptons (to rent).”
Finally, Paulos said, “One of the good things about the Hamptons is there is low inventory, there are no huge new developments, and if you don’t buy an existing house, there just are not that many new homes going up. You see an occasional situation but not a lot. It is mostly existing homes. That is going to help keep the (Hamptons market) from going down too much.”
He believes inflation is beginning to recede using airline tickets and gasoline prices as indicators. Overall, he is optimistic on the long-term economic scenario for Hamptons real estate, but it has to be “normal, not crazy like last year.”
