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The Upper End: Win, Place, or Show?

"... and here comes Luxury Market!"

In this horserace to a more normalized housing market, there seemed to be only one constant. The luxury market has been the horse bringing up the rear. We have been experiencing some stability in the lower price points in almost every geographic market. However, the upper tier price points have had an overabundance of inventory for more than three years, and financing has been difficult. This had led to a nearly non-existent market for luxury properties.

However, it now seems that upper end properties are again becoming popular with the high worth purchaser. We have already reported on two major surveys of high-net-worth-individuals in a previous post, Damn the Data! I’m Buying a House. Both surveys showed that the wealthy buyer was ready to re-enter the real estate market.

Are luxury properties actually starting to sell?

As I travel the country sharing my message with real estate organizations, more and more agents are telling me that the upper end market is beginning to show life.

  • In a section of Miami, which consists of homes valued between $2-5 million, only one sale had been transacted in the previous 18 months. Then four houses in this section sold in a one week period last month.
  • On Isle of Palms, an upper end community on the coast of South Carolina, sales increased 64% in the first quarter of this year (18 sales) over the first quarter of 2009 (11 sales).

Bloomberg.com reported in a story last week:

Home sales in the Hamptons, the New York beach towns swarmed by Wall Street and Hollywood vacationers each summer, more than doubled in the first quarter as buyers seized luxury properties.

Transactions climbed to 396 in the towns on Long Island’s East End, the biggest annual jump in seven years of record keeping. A shift toward larger, more expensive homes pushed the median price up 35 percent to $908,500.

What about jumbo financing?

One big challenge to upper end real estate was the inability of a buyer to arrange financing. All mortgage lending became more difficult as the financial meltdown was taking place. No market was more impacted then the jumbo mortgage market (a jumbo mortgage is a mortgage with a loan amount above conventional conforming loan limits. As of 2010, the limit is $417,000 for most of the US).

The average interest rates on jumbo mortgages are typically higher than for conforming mortgages. Over the last 18 months it was difficult to find jumbo money at any price. But it looks like that is about to change.

Housing Wire last week reported:

A prime jumbo residential mortgage-backed security (RMBS) deal being structured in the private-label market appears ready to thaw the long freeze of credit in securitization, according to sources … The loans bear approximately $222.38m of principal balance, with an average $932,700 principal balance per loan.

And Market Watch reported in a story yesterday:

Since the beginning of 2010, banks including Wells Fargo, Bank of America and U.S. Bank have gotten more aggressive in originating jumbos, said A.W. Pickel, president of LeaderOne Financial, a mortgage lender in Overland Park, Kan. “If you underwrite carefully and cautiously, a jumbo loan is a very good money maker for a bank,” he said.

It seems that the jumbo mortgage market is coming back just as the luxury customer is in the market to buy.

What about prices?

Upper end properties will be no different than any other housing segment. The price will have to reflect accurate value in today’s highly competitive market. We have already seen deep discounts at the higher end, and that will continue to be the case for the foreseeable future.

The pricing dynamic which is playing out in the upper end is no different than the dynamic, which has determined price in the lower and mid-tier markets. Supply is very high and there is a wave of distressed properties (foreclosures and short sales) coming to even the best of zip codes.

The Wall Street Journal reported on this exact point earlier this month:

Houses with loans of $5 million or more will likely see a sharp rise in foreclosures this year, according to a RealtyTrac study for The Wall Street Journal …  In February alone, 352 homes nationwide in this category were scheduled for foreclosure auction, the final step before a bank acquisition. That is the largest monthly number of these so-called notices of sale since the financial crisis began. By comparison, in all of 2009, there were 1,312 such notices.

By comparison, the upper end market will actually see a higher percentage of distressed properties than the other price points have. First American CoreLogic studied over 1,700 loans of $4 million or more and how they compared to all other loans when it came to percentage that were at least 90 days delinquent in their mortgage payments.  The results can be seen in the graph below:

With this inventory about to be added to an already bloated inventory of luxury homes in almost every market, prices will continue to soften. Buyers will take advantage of these good values as they have at every other price point that has already experienced these price adjustments.

What does this mean to you?

If you are a seller of a luxury home, the market is beginning to again see life.  However, your property must be priced properly to sell. If you are a buyer, now might be the time to enter this market either as a homeowner or as an investor.

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