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If Prices Are Falling, Why Are the Rich Buying?

There is an interesting phenomenon taking place in the real estate market. While house prices are falling, the rich are starting to purchase. DataQuick Information Systems reported last week that sales on homes $1 million or more rose 18.6% last year after four consecutive years of decline. This is at the same time that sales outside of this price point actually fell 2.8%.

And even more amazing is that homes over $5 million have also increased substantially. Housing Wire reported that:

In 2010, 975 homes sold in this bracket, up nearly 14% from the year prior.

Why would the wealthy be starting to purchase especially when everyone is predicting that prices will soften? The people of wealth understand finances. They realize that the COST of real estate is a much more important than its PRICE. With the government attempting to make massive changes to the residential lending business, the wealthy know financing  a home may never be better. They realize it is time to buy. They can purchase a million dollar+ home for a rate lower than at almost any time in history.

Rates are at historic lows and the spread for jumbo loans has shrunk dramatically. As CNN Money explained:

Normally buyers have to take out a jumbo loan to finance any mortgage beyond the $417,000 threshold ($729,000 in high-cost cities such as New York). These loans have higher interest rates because they are considered non-conforming — or higher risk — and are not backed Fannie Mae or Freddie Mac.

In 2009 buyers of high-end homes paid 1.8 percentage points more in interest than the average buyer. But in 2010, that spread had shrunk to just 0.6 points more.

They can also fix that rate for 30 years. The 30-year-fixed-rate-mortgage may be a victim of the new lending reforms. Mark Zandi, chief economist of Moody’s Economics addressing the administration’s recent report on reform:

“A private system would likely mean the end of the 30-year fixed-rate mortgage as a mainstay of U.S. housing finance. A privatized U.S. market would come to resemble overseas markets, primarily offering adjustable-rate mortgages.”

Bottom Line

Let’s assume the rich aren’t just lucky. Let’s assume they built their wealth by making good financial decisions. What have they decided about real estate? It’s time to buy.

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7 replies
  1. TR
    TR says:

    Our market has tremendous current activity in this area. Price points are way down across the board. The buyers are cash, no finance contingency, OR offer lender pre approval to see if it will go through without slowing the deal.

    Buyers, seem motivated by sensing the bottom as to price point has to be in or real close. Many of these folks will do some after purchase financing, and those rates and programs (only available to the well off) are not going to be at lower rates moving forward. This we think is motivating (to an extent) the well off to re enter the high end market.

  2. Ruthmarie Hicks
    Ruthmarie Hicks says:

    Most of the wealthy have gone through this recession largely untouched by what has literally crushed the middle class. They sense that the bottom is near. Common sense says “why wait?” I see the same trend where I am as well.

  3. Steve
    Steve says:

    The rich have a different assessment of risk than the middle class and can ride out a bad market and bad decisions. The rest of us can’t. I tell my kids all the time, just because their friends are doing something, doesn’t mean that you can. The same goes for buying a home.

  4. Terry S. Smith
    Terry S. Smith says:

    I am seeing the same thing in Scottsdale and Paradise Valley Az.

    Searching for 2 clients looking for million + dollar homes.

    The best deals are gone in less than a week.

    Homes that have sat on the market for 2-3 years are going under contract.


Trackbacks & Pingbacks

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  2. […] market, economy probably feels like it is booming, and borrowing costs are at historical lows: If Prices Are Falling, Why Are the Rich Buying? For everyone else, economy may still feel like it is a recession. Housing market may be […]

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