Luxury Homes Lose Value.

Courtesy, Wall Street Journal

By Brett Arends at brett.arends@wsj.com

Agents who specialize in the ‘Luxury Home’ market report that prices have been falling for some time.  The big challenge is that there are very few financing options for mortgages beyond the FHA lending limits (currently $417,000).  Additionally, people who would normally be buying luxury homes are changing their attitudes towards these types of purchases.

Valerie Fitzgerald, a real estate agent known as the Agent to the Stars, dominates the Beverly Hills Luxury Home Market.  In a recent interview she shared that the trend now is to not show off your wealth.  Not to be conspicuous.  So, it’s likely that the greater determinant in the falling luxury home values isn’t truly lack of financing but, lack of demand.

It's also worth noting that the rent to own ratio is still valid for homes in this range.  For example, you can rent a beach close home worth $2,000,000+ in Southern California for $3,000 -$5,000 per month.  By contrast, look at the mortgage payment for a buyer.  With a 20% downpayment ($400,000) and a mortgage balance of $1,600,000, plus real estate taxes, and favorable interest rates, the house payment would be $11,000-$14,000 per month. (not including the upkeep on the home).

Chances are …. people with money have money because they learned how not to be wasteful.  Does it make sense to tie up $400,000 into a down payment then be obligated to $11,000+ per month in house payment when you could rent the same (exact) home for $3,000 per month?

You tell me.  How does this make sense?

Will luxury home prices fall to the point where the rent versus buy ratio is in line?  I doubt it.  But, you never know.  Perhaps we may see luxury homes fall even further than ‘normal’ home values.

For the full article, click on WSJ.com

Falling real estate prices are becoming as much a feature of high-end neighborhoods as ocean views, infinity pools, and four-car garages.

While the latest data suggests prices for mainstream homes may be stabilizing after several years of pain, the news for luxury homes isn’t looking as good.

That’s bad news for sellers, naturally, but anyone in the market for a home listed for $2 million or more will find deeply discounted asking prices—and may be able to command even lower prices.

On Tuesday, data from the Federal Housing Finance Agency showed that average home prices ticked up 0.3% nationwide between June and July, including a 1.6%bounce on the west coast.  The gains are modest, and they are partly influenced by the season—higher-end homes tend to sell better in late spring and early summer, as families try to move before the school year.  Analysts are disappointed the rise was not higher.

Nonetheless, prices have now risen three months in a row.  And compared with the disastrous events of the past few years, anything other than Armageddon is apt to raise spirits.

But these numbers only relate to homes purchased with conforming loans backed by the FHFA—in most areas, that describes mortgages of up to $417,000, or up to $713,000 in the country’s most expensive regions.

A stone patio surrounds the pool outside a spec home at 38 French Road in Greenwich, Conn.  The city is seeing the worst home-sales market—and deepest discounts—in decades.

“The $10 million to $30 million properties are on the market for a very long time,” says Cathy Wood, a real estate broker covering Beverly Hills and surrounding areas for realty firm Gibson International.  “They’re seeing a lot of price reductions.”

Realtors, how are agents in this price range getting these homes sold when the owners have negative equity? …. Short Sales.  There are new techniques and systems to getting short sales sold and closed within 45 days

Realtors,she says, “are now selling $500,000 condos, when they used to sell $5 million homes.”

Across the country in hedge-fund haven Greenwich, Conn., local broker Eric Bjork at Prudential Real Estate finds a similar effect.  “There’s a new level of value being set,” he says.  “The $8 million [homes] are selling for $6 million, and the $10 millions are selling for $8 million.  When you do the math, it looks like an adjustment of 20% to 30%.”

You’ll find similar anecdotal data in several high-end markets.  But real estate Web site Trulia.com, which tracks listing prices on multiple listing services across the country, took a look at what’s happening to listing prices for homes over the $2 million mark.

Such homes only account for about 2% of the properties listed on the site, but represent 25% of the total price reductions by value.  Overall, sellers listing homes for more than $2 million have dropped their asking prices by a total of $7 billion, with an average price reduction of 14%.  The average for all properties tracked by Trulia is only 10%.

Data for individual Zip codes is intriguing, whether you’re in the market or you just like to rubberneck.  According to Trulia data, 28% of the homes currently for sale in Beverly Hills  (Zip code90210) have dropped their price, with an average discount of 11%.  In Aspen,Colo., (81611), 39% of the homes have cut their price, by an average of 16%.

On New York’s Upper East Side (10065), no less than 40% of the homes have slashed prices—and by an average of 18%.  In California, some of the most exclusive areas in Newport Beach, Big Sur and Monterey have seen a third of the sellers reduce prices, by an average of about 15%.  Malibu?   More than half have cut prices.

Chip Case, economics professor at Wellesley College and one half of the Case-Shiller index duo, says that some of these markets may be finally catching up to the wider housing market crash.  “That level was more in the hold-out category,” Mr. Case says.  “Up until recently the foreclosures weren’t hitting that level .  But they are now. There’s no question about that.  You’re seeing some contagion from the prime level to the luxury end.”

Bottomline:  At the high end, it’s a good time to be shopping for that dream home.

During—and after—a bubble, investors often hope that “quality assets” will hold value.  It’s usually a vain hope.  Just ask people who owned luxury condos in Tokyo after 1990, or investors in CiscoSystems (CSCO) after the tech-stock bubble popped.   Real estate is not that different.

Sooner or later, even rich homeowners need to sell.  They get divorced.  Their company collapses.  They relocate or retire.  And, when they get tired of waiting, they cut their price.  Factoring in taxes, upkeep and the opportunity cost of keeping money in a non-performing asset, an empty luxury home may be costing owners a lot just by sitting there.  That gives them a powerful incentive to make a deal.

Tags: wealthy, rich people, luxury real estate market, luxury home market, FHA loan limits, jumbo loans, conforming loans, Case-Shiller index, luxury distress sales, foreclosures, short sales, pre-foreclosures, Federal Housing Finance Agency, FHFA, ATLShortSales.com