The action this spring home-buying season isn't unfolding in prestigious Manhattan or Beverly Hills, but in a middle-class neighborhood near you.
The global economic meltdown has put a freeze on sales of mansions and penthouse condos, which held strong through years of tight credit, foreclosures, and plummeting prices in lower-cost markets. These days, sales of lower-priced houses are accelerating as first-time home buyers and investors take advantage of bargain prices, low interest rates, and government incentives.
One thing hurting the luxury market is that jumbo mortgages—typically those larger than the conforming limit of $417,000—have higher interest rates and are tough to get, requiring pristine credit, six or more months of reserves, and full documentation. The deteriorating economy also makes it difficult to justify making a discretionary purchase of more than $1 million, especially with so much uncertainty in the job market.
Pulling Back and Being Careful
Rick Goodwin, publisher of Unique Homes magazine and uniquehomes.com, said even wealthy Americans who aren't worried about paying the bills are feeling the "psychological effect" of the economic meltdown.
"Even if you can afford to buy certain things, you're less inclined because you feel that you should pull back and be a little more careful," Goodwin said. "Does it really look good, in this kind of market, to be spending this much money on a house, boat, or airplane?"
The luxury market hasn't been infected by foreclosures the way other markets have. Wealthy people often have large savings accounts and other resources that allow them to continue make mortgage payments even when faced with a job loss or a sinking stock portfolio. Sellers in this market can hold on for a long time without a sale. And that's what they're doing.
In Orange County, Calif., for example, homes selling for less than $1 million were taking 3.58 months on average to sell as of February (above the healthy two-month level, but still good), said Mollie Carmichael, senior vice-president at John Burns Real Estate Consulting in Irvine, Calif. But homes above $1 million were taking 19.6 months, well above the six-month level once considered healthy for the luxury segment, she said.
"The days on the market has really increased across many markets on the higher end," Carmichael said. "There's just more competition, and assets are sitting longer."
BusinessWeek.com asked Altos Research in Mountain View, Calif., to find the Zip Codes in large metro areas where listing prices were actually rising. We expected to find places where competition was pushing up asking prices as homes changed hands quickly. Instead, what we found was that the Zips showing the most listing-price appreciation were among the most expensive markets and the median listing price was rising, in many cases, because more luxury listings were entering the mix. In other words, wealthy homeowners were putting their expensive properties up for sale at the same time that the less expensive homes were being sold.
Take Winnetka, Ill., a wealthy suburb 16 miles north of Chicago. The median listing price is $1.5 million, up 12% from a year ago, according to Altos Research. But the mix of listings has shifted to the higher end, and properties are taking 245 days to sell.
"Even though the listing prices are up, this could be the net effect that the houses on the top of the market are coming onto the market because of the negative economic environment," said Scott Sambucci, vice-president for data analytics at Altos Research. "Even though the list prices are higher, it doesn't always mean that the market is strong."
The sellers in the Zip Codes that made our list have plenty to be thankful for. The low-priced markets where sales are spiking and list prices are falling are often dominated by bank-owned listings and listings by desperate sellers facing foreclosure. Of course, it will only help those markets in the long run if inventories of unsold homes are cleared away to make way for a recovery.
From an F to a D-
The housing market is in terrible shape, but several reports this week provide some reason for springtime optimism. The Commerce Dept. reported that new-home sales increased by 4.7% on a seasonally adjusted basis in February compared with January. Sales of used homes jumped 5.1% in February compared with the previous month's seasonally adjusted rate, the National Association of Realtors reported. And the Mortgage Bankers Assn. said mortgage applications surged 32.2% for the week ended Mar. 20 over the previous week (though much of that activity was related to refinancing).
The news was encouraging. But rising unemployment could keep any sort of recovery in check.
"The market conditions have improved," said Lisa Jackson, vice-president at John Burns Real Estate Consulting. But "conditions are still fairly horrible…. Maybe it has moved from an F grade to a D-, but it's moving in the right direction."
Christopher Hain, real estate agent for Ramsey-Shilling in Hollywood, said high-end buyers are starting to drop prices because very few big-ticket homes are selling.
"When things don't sell, there is downward pressure on prices," Hain said. "But at least you don't have the added pressure that you have in the lower-end markets of a flood of foreclosures, which can become a double whammy…. A lot of these people can wait things out."
Click here to see the Zip Codes in the biggest metros where listing prices are still rising.
Gopal writes about real estate for BusinessWeek in New York.