Real estate unreal | Looking for Alpha
The moving tectonic plates that inspire market quakes are interest rates. And for the entire lifespan of Gen Z, they’ve been sitting still at record highs. In the 1980s, consumers were attracting 10% interest on a CD. It is a “certificate of deposit” for anyone under 30. For anyone between 40 and 60, it’s still a “compact disc”. But I digress.
It’s the boring things that make money – software, insurance – and/or kill you. Lawn mowers kill 90 Americans each year, compared to 10 people killed by sharks worldwide. Interest rates have moved closer die hard (1988), in which Hans Gruber plans to fake his own death and murder dozens of people so he can steal Nakatomi Corporation’s interest-bearing bonds. “By the time they figure out what was wrong,” says the villain, played by Alan Rickman, “we’ll be sitting on a beach, earning 20%.”
It is unlikely that this line will be written today. Bond yields are at historic lows, a quarter of what they were in the 1980s, and ‘savings’ accounts offer comically low ‘interest rates’ that start with ‘dot oh’ and s ‘worse from there. Low interest rates make fixed income investments less attractive and drive up asset values through cheap leverage. The S&P 500 Shiller P/E ratio, a respected indicator of the relative price of US equities, is flirting with an all-time high.
The American dream of home ownership has become a hallucination – the apparent perception of something non-existent. Housing, already on a 12-year tear, has now won the hunt for a pandemic that has made everyone’s home unbearably small and shabby. Eight out of 10 urban areas in the United States saw average house price increases of more than 10% in 2021. Fifty years ago, an average house cost two years of the average American household income. Today it costs four.
All of this raises an important question: where should people put their money? Crises typically provide buying opportunities for the next generation as they enter their best earning years following a reset. Just as earthquakes relieve geological pressure, falling asset values are a societal release, giving rise to a key component of any healthy economy: churn. But this time, our baby boomer-dominated government used Covid-19 as cloud cover to protect and expand the wealth of the already rich. Removing volatility protects holders; for the first time in US history, a 30-something is not doing as well as his 30-year-old parents. The result ? Young people are creating their own asset classes and volatility. In 2021, these forces manifested themselves in crypto and meme stocks, which offered a mix of volatility, a halo of tech, and a bustling cast of aggressive carnival barkers (aka evangelists).
But established crypto assets have been bid up and trade correlated to the stock market. Across the street, the meme stock trade unfolds as investors realize they’re not investing in a movement, but in a theater chain. It’s as if the era of outsized returns is coming to an end. However, as Yoda said, there is another. I think 2022 will bring increased attention and a potentially asymmetric advantage to…virtual real estate.
Virtual real estate is simple: parcels of land in a digital world (i.e. the metaverse) whose value is determined by factors similar to those that determine the value of physical real estate – namely, how big/cool/developed/close to other cool people/events they are. In a virtual platform like Sandbox, you can buy beachfront property, or something next to the mall, or something next to… Warner Music Group headquarters?
Once you own it, it’s yours and operates the only utility I can discern from the blockchain – a ledger that keeps impressive records. You can develop real estate, rent it out, entertain friends, organize parties, open a store or a (virtual) theme park, whatever you want. You just can’t… inhabit the.
Why do we think metaverse real estate could be the Gamestop of 2022? Answer: Brand. The mythology of real estate is that its value never goes down and ownership makes you more responsible and attractive to potential partners. Seventy percent of single women in China say that if you don’t have a marriage certificate, you’re not a viable partner.
Just as Robinhood fomented a myth that watching a day-trading app invests or learns rather than plays, metaverse real estate combines the heavy, comfortable hedging of a boring asset class with the memetastic growth narrative of the crypto. Nitro, meet glycerine.
Money is pouring in and a flood could ensue. Virtual real estate sales topped $500 million in 2021. Analysts predict that number will double in 2022. Land on Sandbox was recently purchased for $450,000 because it meant… being meta-neighbors with Snoop Dogg. There’s also commercial real estate: luxury designer Philipp Plein bought a property on Decentraland for $1.4 million; it will soon become Full Plaza. And a dedicated real estate development: Real estate company Metaverse Republic Realm recently made the largest virtual land purchase in history – $4.3 million.
The upside defies the projection – 5x, 10x, 20x? The innovation in Web3 assets is that they are not compared to tangible income, let alone profit. Moving through deep space, devoid of any giant astrophysical objects, neither time nor relative size/rating makes sense. Instead of depressing things like manufacturing, human customers, or anything that produces reliable cash flow, this asset class offers the love of credentialed, persistent, and rabid supporters. They recognize the story as the book, not the actual words inside.
Similar to crypto, virtual real estate will be awash with pumps and dumps and artificial inflation. Crypto lets you mine multiple portfolios: what’s stopping you from buying a property, selling it to yourself a dozen times at spiraling valuations, hiring a PR agent to post jaw-dropping stories in the press and then selling it 5,000 times what you originally had? paid? BTW, nothing in the system prevents you from doing this. Indeed, the anonymity of the blockchain encourages it: the most expensive art sale in history was a $532 million NFT that the owner sold to… himself.
The Wild West gestalt of virtual real estate will likely attract more users than it repels. As in gambling, the odds don’t have to be in your favor to make it worthwhile, as the payoffs could be huge.
Ok, but what is the fundamental value? Past. There’s no way to know, and it could suck. [Editor’s Note: It’s probably zero.] When the molly fades, we can perceive valuations unrelated to reality by orders of magnitude. Or we could all look back and say we “knew this technology would last”. What if it was 1950, and I offered you a chance to buy the Glendenning family farm for $20 an acre?
And why not? Metavers or not, we live more of our lives practically every year – we have more conversations on Twitter, more meetings on Zoom. Sex and rock ‘n’ roll are increasingly online. (Now, if only they could get drugs through these tubes…) Don’t we want a home? Fewer people can even afford a first home on dry land today, why not a palace in Decentraland? MetaWeWork, anyone? (Prediction: whatever Adam Neumann decides to buy $1 billion worth of luxury apartments will involve NFTs and the metaverse.)
There is a precedent for this. In 2006, Ailin Graef (meta name: Anshe Chung) became a millionaire by developing real estate properties on a virtual platform called Second Life. She quickly got a profile in BusinessWeek and has become the face of economic opportunity in the digital age. Maybe it was possible to create real value in a virtual world.
In 2007, Second Life’s GDP was greater than that of several small countries. It had a “population” (metaspeak for monthly users) of almost 2 million. Over $3 billion has been spent on in-game transactions in a decade. But then he faltered. There wasn’t much to To do in Second Life, once the thrill of customizing your avatar and clumsily walking through a cartoon landscape wears off. This required more powerful computers and higher bandwidth than most people had access to at the time. Security was weak; vandals and griefers proliferate. Several competing virtual worlds entered the fold, breaking up the already limited community. The value promised by Second Life was only real if enough people believed in it. In 2006, it was the predominant virtual world – and we all believed in it. Until we didn’t.
It’s the part of my net worth that I think I’m putting into virtual real estate, because that’s what I’m willing to lose. If I was 25, I would invest maybe 10% of my investment capital – an amount I could afford to see disappear. Let’s be clear: as a standalone investment, this is gambling. But allocating a fraction of your portfolio to volatile crap that can provide an asymmetric advantage (i.e. outsized return) is less irrational than it sounds.
As you age, real estate becomes the hippocampus of your brain, where memories reside. I remember the 1,100 square foot two-bedroom apartment in Tarzana I grew up in. I see myself under my NFL bedspread in the middle of the night, when my nosebleeds wouldn’t stop and my mom comforted me with math problems.
I remember entering the chicken coop in New York where my dog was ruined, so excited when I got home he couldn’t control his bladder. Our house is now alive in the morning with one boy claiming he is too sick to go to school and the other waiting outside the door with a backpack that appears to be carrying him. In the future, I will remember the silence of the house, in the middle of the day, without the boys. I will remember feeling helpless, knowing that an unrelenting calm was coming, as they left and found their own real estate.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.