The luxury market in 2009 will be very different than in 2008
For most of 2008, the luxury market has been bi-modal. The bottom half of the of the upper tier has been slower than one would normally expect during a market slow down, because many entry-level luxury buyers have stretched to buy as much house as possible, often using loans which proved to be inappropriate for their situations. This resulted in inventory increases and declining values.
On the other end of the spectrum, the top of the luxury market has been strong for the first three quarters of 2008. National and world records were set for most expensive residential sales and the very top of the market in most metro areas remained active, while properties at other price points languished. Helping to drive this top of the market activity -- the number of wealthy in the world has increased and the wealth they control has grown.
As the last quarter of 2008 begins, the global financial market meltdown has created a wait and watch mentality across price ranges. Buyers at the very top are citizens of the world and their luxury home purchases are often portfolio plays as well as lifestyle purchases. Leading up to 2008, many very successful individuals had not only moved more of their assets into direct and indirect real estate investments, they had shifted more of these dollars into ownership of multiple residences. In 2008, asset allocation has shifted again – cash, precious metals and treasuries are king – but residential real estate is still an important part of wealthy individuals’ portfolios.
This year has been a reminder that real estate is a local business. Metro areas which have enjoyed strong job and population growth, yet not seen a big run up in real estate prices, are outperforming the market in general. Dallas is a good example of this. By contrast, NYC which prospered during Wall Street’s derivative excesses, may face a more sobering marketplace during the last quarter of the year.
The international buyer has been an important market segment this year. This niche will still be significant in 2009, but wealthy international buyers will most likely be more cautious purchasers. Even the big-spending Russian Billionaires must be feeling the result of oil price declines, the drop in the Russian stock market, and the credit crunch of recent weeks. However,targeting the very wealthy is still smart strategy.
Although it’s difficult to predict, at this point, how 2009 might play out, the key factor will be how quickly a US and global financial recovery occurs. If governmental actions across the world stabilize the financial markets and consumer confidence returns, activity in the top half of the luxury market should be strong again. In the bottom half of the luxury market, inventories will remain high in early 2009, creating a buyers’ market.
Financial market health, Interest rates, credit availability, relative currency values, stock market conditions, attractiveness of alternative investments, and political conditions are all wild card factors that will impact the luxury residential market in 2009.
The good news is that the luxury home market is the last segment to slow and the first to bounce back!
