3 Reasons Million-Dollar Homes Are in a Slump By Anthony Jerdine | May 13, 2016
The average sale price of U.S. luxury homes was down 1.1%, marking the largest decline in more than two years, according to Redfin, a company that provides web-based real estate database and brokerage services for residential markets. This slump marks a significant shift from a few years ago: Following the financial crisis of 2008, the wealthy enjoyed a strong recovery, and luxury housing was the top segment of the real estate market.
Today, home prices for the broader housing market – the other 95% – have risen 4.7% year-over-year, while the top 5% has become one of the weakest real estate segments. “For years, the high end was driving sales and price,” said Nela Richardson, chief economist at Redfin. “Now, the demand is at the middle and lower price range.” Here is a look at three factors that are contributing to the slump.
1. Stock Market Volatility It’s not unusual for high-end buyers to tap into their investment portfolios to finance luxury home purchases, either by cashing out a few stocks or borrowing against the portfolio using a non-purpose loan – a type of margin loan that uses the investment portfolio as collateral. Historically, high-end housing is hit the hardest by stock market downturns. “As you go up the income quintile, into the top 10%, 5%, 1% by income, their stock exposure increases,” said CoreLogic deputy chief economist Sam Khater. “For the typical family, the bulk of their equity is tied up in home equity, not stock equity. It’s the reverse for high income.”
The first two months of this year tested a lot of nerves on Wall Street as investors feared a repeat of the 2008 financial crash. The volatility has left some would-be luxury buyers cautious, and rather than jumping in now with all the volatility and uncertainty – both here and in overseas financial markets – many luxury buyers have decided to wait and see what happens in the second half of 2016 before making any decisions about entering the real estate market.
2. A Strong U.S. Dollar Overseas buyers bought $104 billion in U.S. real estate – about 8% of the total existing home sales’ dollar volume – during the one-year period ending March 2015, according to a report from the National Association of Realtors (NAR). Buyers from China, Hong Kong and Taiwan were the top foreign buyers of real estate, accounting for nearly $29 billion in sales.
Now, demand from foreign buyers is weakening in response to a strong U.S. dollar (and the relative weakness of other currencies), coupled with higher home prices for those buyers – a situation that greatly affects the affordability of high-end properties. In January, for example, the median price of existing U.S. homes was 67% higher than a year ago for buyers from Brazil, due to changes in the exchange rate, according to NAR. For Canadian buyers, the price increased 27%, and for Chinese buyers, 14%.
3. Oversupply at the Top During the first quarter of 2016, the number of luxury homes on the market – defined as the most expensive 5% of homes sold in a quarter – increased from a year prior, according to analysis from Redfin. For homes for sale above $1 million, there was a 3.3% rise in inventory, to 70,962; homes listed above $5 million were up 13.2%. “There is oversupply at the high end, especially in certain pockets and cities,” said Redfin’s Richardson. “They should be flying off the shelves, but these homes are just sitting there.”
Deeper inventory, paired with more nervous luxury buyers, has led to price cuts across the country. In Los Angeles, for example, an $18.8 million home sold for $10 million in the first quarter of this year. A $14 million home in The Woodlands, Texas, sold for half that – $7 million. During the same quarter, the highest-priced sale (outside of New York) was a 2.2-acre estate in North Laguna, Calif. listed for $75 million. It sold for $45 million – a 40% discount.
The Bottom Line Across the United States, the average sale price of U.S. luxury homes fell 1.1%, but certain markets have been hit harder than others. In Miami Beach, for example, a surplus of luxury development, combined with fewer foreign buyers, led to a 13.7% drop in luxury home prices. In Austin and Boston – considered hot real estate markets today – prices in the top 5% fell almost 12%, while at the same time, prices for the other 95% of the market rose 5.1% and 6.3%, respectively. Prices for luxury real estate may continue to drop while there’s volatility in the stock market, an oversupply at the top and foreign buyers are skittish.