Feeling The Crunch in High End Real Estate

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Saturday, July 5th, 2008 Subscribe To Our Feed

So much has been written and talked about recently regarding sub-prime mortgage woes that some wonder if the high-end real estate market will feel the trickle down – or “trickle up” – affect.

It’s true that some parts of the high-end real estate market have been hit by the housing slump that’s currently got a grip on most of the U.S. With more people facing tougher economic times and having to make sacrifices just to meet their mortgage payments, there is an affect on surrounding businesses, with less cash flow coming in for many luxury items. And with so many major sectors of the American economy struggling – automotive, construction, banking, and the like – it seems obvious that no one would be immune to the ensuing problems.

And of course real estate has its own set of circumstances that are far felt. For example, during the housing boom of just a few years ago, many speculators snapped up housing in several so-called “hot” real estate markets, intent on reselling to other speculators or private buyers. However, they have often found themselves stuck with properties that they cannot move, either to other investors or purchasers. This has happened in areas of Florida, California, Texas, and other warm weather climates that seemed impervious to affliction.

But is it “gloom and doom” for high-end real estate investors?

Many analysts say no, there is no need for real estate investors, especially those who invest in high-end real estate, to panic just yet. It doesn’t mean that there is soon to be no money in the market; it just means that investors need to be smart – and careful – about where to put that money.

One reason for this is that the sub-prime mortgage woes have typically hit the borrowers who were high risk in the first place – this is why those mortgages are referred to as “sub-prime.” These mortgagees had perhaps a high debt to income ratio, were in career fields where there was much volatility and little stability, and who were often enticed by purposely under-inflated introductory interest rates.

In other words, the mortgage industry and real estate markets have taken a downturn for those who were high-risk to begin with. Thinking that this means that all real estate is now a bad investment is like seeing high-risk stocks fall and then thinking that the entire market should be abandoned for something else. That’s just not logical or practical.

Some analysts are even pointing out that while the real estate market may be slumping in other areas, the high-end market is experiencing a real and credible boom. Notice what was said in the Boston Globe on September 20, 2007, regarding the high-end real estate market in the state of Massachusetts alone:

“Sales of single-family homes priced at $1 million and above have surged 9.6 percent so far this year, compared with a 5 percent decline in sales of homes under $1 million, according to Warren Group, a Boston publisher of real estate data and news.

‘People worth $5 million or $10 million are buying houses,’ said Dan Kaplan, editor of New England Home magazine, which will highlight the luxury-home trend in an article planned for the November issue.

‘They are not letting little market blips bother them,’ he said.”

There are of course many reasons for this. One may be that wealthier homebuyers are less affected by other economic indicators, and may have careers that afford some stability and security – and have been in those careers for years.

Another reason may be that some homebuyers wait out a housing slump, seeing how low market prices will actually go. This is not typically a practice for the high-end real estate buyer, who is purchasing a home without much regard for price. They desire luxury, not a bargain, and have the means to afford that luxury.

Additionally, many high-end buyers are purchasing homes out of need, such as for retirement or job relocation.

According to Dan Kaplan, quoted above, about 1 in 3 buyers who pay more than $1 million for a home actually pay cash, further demonstrating their lack of a need to wait out the market, and showing how unaffected they typically are by other economic indicators. Many of these buyers are executives in the fields that are still strong, particularly biotechnology, high-tech, and finance, where stock options awards and bonuses are common.

Those purchasing high-end real estate do have particular interests, of course. Again, they are looking for luxury, not just a place to live. While many may have families, it’s not the typical suburban, white picket fence home that interests them. Modern amenities and upgrades are nonnegotiable. And most want to maintain a certain lifestyle that co-ops, condos, and apartments can afford them; even those with families are looking to maintain this. In other words, they would rather have a view of the city than a yard in the back.

And it’s not only retirees and empty-nesters who are searching for just such real estate, as if high-end condos or apartments were the only hot sellers. Many buyers are purchasing homes that are 3,000 square feet, or even larger.

Getting back to the state of Massachusetts, buyers and sellers alike seem to understand this. There are many oceanfront streets where you can find one $1 million-plus sale after another. Some homes are “do-overs,” meaning expansions by the new owners that preserved remnants of the original houses, and “tear-downs,” by buyers who razed the existing structures to build historically accurate homes.

As a matter of fact, this may be one of the few areas of the country that is truly a seller’s market. Cohasset, just nine square miles on Boston’s South Shore, seems to be packed with luxury homes, and is a place where even a cool $1 million doesn’t buy much of a home anymore.

But the one thing they all seem to have in common is the luxury that high-end buyers can afford, from the oceanfront view to the historical accuracy. And knowing that there is still a market saturated with buyers is good news to the ears of the real estate investor, worried about the mortgage crisis or so-called real estate crunch.

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