In 2007, as the mortgage market collapsed and the U.S. economy fell into a tailspin, the country’s real estate market fell right along with it. Nearly a decade later, “recovery” is no longer the buzzword. Today, markets are either “recovered,” or they’re “damaged.” And the distinction is pronounced among the nation’s luxury markets, particularly when looking at properties valued at $3M-plus.
“The luxury market was the first to recover from the housing downturn,” said Nela Richardson, chief economist for real estate company Redfin, who went on to explain that since recovering, luxury markets around the country have slowed down.
The Luxury Market.
Luxury home prices fell during the first quarter of 2016, dropping 1.1 percent since the same time last year, according to a report from Redfin. For those following the luxury market, the decline came as little surprise, as the pace of price appreciation had been slowly declining throughout 2015. However, the drop does mark the first quarterly decline in over four years.
The disconnect between luxury and mid-market buyers stems from a fundamental divide on what’s important. Lower-tier buyers are watching mortgage and interest rates, waiting for the right time to finance, while luxury clients are more concerned with overarching financial trends and international economic climates.
“Luxury buyers are out of step with the rest of the market because their wealth is at stake,” Richardson said, predicting prices to either remain flat or drop 2 percent this year.
But again, the performance of markets has been split on a metro level.
According to Redfin, in major luxury markets around the country, average sale price fell in at least 14 cities. Year-over-year drops varied from less than 1 percent in San Jose, California to 4.2 percent in Washington, D.C.; to more than 5 percent in Houston, Texas; 11.8 percent in Boston, Massachusetts; and 13.7 percent in Miami Beach, Florida. And in the Atlanta, Georgia suburb of Sandy Springs, where the luxury prices were hit the hardest, the decline was nearly 15 percent.
Redfin also recorded price increases in at least 17 major luxury markets, with no increase being less than 8 percent from the same time last year; and some, like in Oakland and Irvine, California, being more than 40 percent.
The Influence of the International Buyer.
The level of international buying activity has been perhaps the most significant indicator of how any given luxury market will fare in recent years, as increasing demand from China, Russia, Europe, Latin America, and Brazil become major sources of business for the country’s top luxury markets, like South Florida, New York, and California.
In 2015, the National Association of Realtors reported that foreign sales dollar volume had broken the $100 billion threshold and accounted for 8 percent of all existing home sales volume. What’s more, international buyers were paying more for their properties than domestic buyers, averaging nearly $500,000 per property compared to only $256,000. The point being: They prefer the luxury market.
In an interview with Miami Agent magazine, Douglas Elliman Florida CEO Jay Parker explained that foreign buyers are not necessarily as interested in U.S. real estate as their purchases lead on. Instead, the investments act as havens for money that might otherwise attract unwanted attention from their home governments and others with potentially nefarious intentions. He explained that “high-net-worth individuals” in countries with volatile governments and economies “face the risk of kidnapping [and] exploitation,” and that by “investing [their money] in foreign real estate markets, they’re probably seeking to avoid that information getting to their home country.”
But even with an increase in purchase prices throughout 2015, international sales declined 12 percent.
Strife in several countries has acted as a resistor for business. China devaluing its currency in the face of a plummeting stock market has severely weakened the country’s economy. Initially, China’s downturn prompted many of the country’s high-net-worth individuals to reinvest their funds overseas to protect it from being devalued. However, as the state caught on to the trend, it’s taken measures to limit the amount of money citizens can withdraw overseas and take out of the country. According to CNN, China has limited the amount of money an individual can move out of the country per year to $50,000, and international withdrawal limits are now set at $15,737. The limits are doubly imposing, as 55 percent of foreign buyers, wanting to avoid the headache of international mortgage financing, make their purchases in all cash, according to NAR.
In talking with The Wall Street Journal, Karen Xu, who works with an investment consulting firm, said that China’s economic slowdown had made her reconsider investment in the American real estate market. “Maybe I’ll wait another five years, or invest in China,” she said.
A Secondary Issue of Oversupply.
The second major issue hurting luxury markets is oversupply.
In Miami, the condo market is at nearly an 11-months supply, which is well above the six- to nine-months supply that is typically considered “normal.” But even despite luxury condo sales falling in the city, developers are continuing to pump out tower after tower. Miami is slated to take on an additional 22,000 condo units by 2022.
It’s proven a major problem in the Chicago suburbs as well.
According to a report from Chicago Agent magazine, in 29 of the city’s suburbs, the luxury home market inventory currently represents more homes than sold in the previous 12 months. For instance, in Lake Forest, there are currently 211 luxury homes listed for sale. However, only 106 such homes were sold in the area in the past year. In Burr Ridge, there are 88 homes for sale, compared to the 34 that were sold in the 12 months prior.
And the problem isn’t unique to Chicago and South Florida; it’s endemic.
Jonathan Miller is the president and CEO of Miller Samuel, a real estate appraisal and consulting firm, and he attributes at least some of this problem to what he describes as “aspirational pricing,” Mansion Global reported.
“On the resale market, you have this new term in New York City, it’s called ‘aspirational pricing.’ It’s this idea that you are hoping you can get your price and anything less than that you aren’t going to sell,” he explained.
The big issue, as mentioned earlier, is that prices are dropping around the luxury market, and thinking you’re in a buyer market is counterintuitive.
Miller described the disconnect between luxury sellers and buyers as the “biggest challenge” facing New York’s luxury market, and it will likely prove a significant hurdle for the overall luxury market, as well.
The Takeaway.
The data confirms the “recovery” in luxury real estate has already happened. This presents a challenge to sellers who have high-end property that they want to sell. The Concierge Auctions’ platform is specifically designed to expand the market through global exposure and ultimately brings liquidity to sellers through competitive bidding.
Our platform is the smart balance between liquidity and control along with priceless peace of mind that the money is in the bank.
To learn more about how our process works, call us at 212.202.2940.