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December 2010

Laurie’s Luxury Market Predictions for 2011

Laurie_Moore-Moore_headshot 2010 saw the beginnings of a recovery for luxury overall. What do you see happening in 2011 with luxury in general, including retail sales and demand for other luxury items?  

The number of “money millionaires” (those with a million or more in investable assets -- not including real estate) has rebounded after the drastic decline of 2008 and global wealth has returned to 2007 pre-crisis levels.  In addition, we’ve seen a recent resurgence of consumer confidence on the part of the affluent.  The growing number of wealthy who are feeling better about the economy (and feeling better about their own portfolios!) bodes well for luxury purchases next year.  In fact, luxury hotels and many high end retailers have already reported sales gains in 2010.

Will the recovery of wealth continue? 

Unless we have some “wild card” economic event that sends everything spiraling down, the wealth recovery will continue and it will continue to be more global.  North America and Europe will enjoy increasing numbers of wealthy, but China, Russia, Turkey, Brazil and many other countries will see an even greater percentage growth in the number of wealthy households. 

Has the global recession affected attitudes and buying preferences of the wealthy?

Attitudes of affluent consumers appear to have undergone some changes since the economic meltdown.  At least for now, “whispering wealth” rather than “flaunt it if you have it” seems to be a common philosophy.  Although some propose that this is the result of feelings on the part of many of the wealthy that the current economy demands some restraint, research actually shows that only a small percentage of the affluent report this as a reason to spend differently.  Instead, this new attitude may be driven by a growing desire for quality and exclusivity over bling. 

 Expect the search for quality at a bargain to continue to make the Internet a stronger distribution channel for luxury goods and services.  Private online sale sites offering quality at a savings will grow in number and sales volume.  Quality, fine design, artisanship, and bespoke items will sell across categories from leather goods to women’s shoes and men’s clothing.  Since the use of the internet rises as wealth increases, also expect the luxury homebuyer to gather housing information and check out listings online.

How will changing attitudes affect luxury homebuyers in 2011?

Luxury homebuyers…

  • Are demanding more and better information about the market and the property
  • Are looking for value, will negotiate price, and are looking for prices well below those of 2006 and 2007
  • Are skeptical of pre-construction offerings
  • Are often looking for lower-key, less flashy properties
  • Want neighborhoods with available health care, low cost of living, and safety (especially if they are boomers)
  • View green as desirable; however, maybe not, if price is higher
  • Want seamless service which saves them time
  • Are looking for lifestyle experiences and stories to tell 

What do you see happening with luxury real estate in 2011? 

Nationally, the luxury market has already started to outperform the overall housing market.  According to NAR, the market segment which has seen growth in the number of transactions in 2010, is the over $1million price point.   This is true nationally and in every region.  However, recognize that this million dollar plus niche is small – somewhere between 2% and 2.5% of the total housing market.  The affluent are revaluating where to invest. Many are putting their money into residential real estate. My best guess is that the luxury housing market will lead the housing recovery.  Markets will have to work through existing inventory including luxury short sales and foreclosures, so the rate of recovery will vary across metro areas, but look for the number of high end home sales to rise slightly in 2011, even though prices will remain generally depressed.  This assumes that we don’t have another economic meltdown.  Real recovery may be a couple of years ahead.

What about international buyers in the U.S.? 

U.S. purchases by international buyers will be important in 2011.  The growth in wealth around the world will help fuel demand for foreign buyers to purchase in the U.S. The U.S. is still viewed as a safe haven for investment.  Visa challenges and other governmental issues may moderate international demand, but the potential is strong.  The U.S. second home market will benefit from this.  Some foreign second home markets are still overbuilt (Dubai) or dealing with ownership issues (Spain).  Economic problems in Europe and the resulting austerity problems will dampen recovery in 2011. Prime property in prime locations (especially waterfront with private docks or marina access) will lead the rebound when it comes.  

Is there any one thing that will be the big luxury housing story of 2011?

China! China! China!  The growing number of very affluent Chinese already makes them significant players in the luxury travel and high-end consumer goods categories.  Watch for them to move into U.S., Canadian, and other luxury home markets in a bigger way in 2011.  While this obviously won’t affect every community, major markets which attract international buyers may see increasing numbers of Chinese prospects. 

What Strategy should a luxury agent use in 2011?       

Four important strategies for building a strong position in the luxury market (regardless of the year):

  1. Position yourself as THE luxury expert.  Do the research to define exactly what’s happening in each price band within your luxury market and compile that research on a monthly basis in a luxury market report.   Today’s affluent consumer wants to understand the market and will gravitate to the source of valuable market information.
  2. Know your competition and network with them.  Analyze luxury listings and sales for the past year and determine which firms and agents really do the business in various price ranges (don’t assume you know).  This will not only identify your competition, it will give you a “hit list” of agents to target for networking.  Be sure you know what other firm’s luxury programs offer so you can build a competitive offering.
  3. Work to build necessary competencies and make sure you have the right “marketing toolbox.”  An agent’s success is dependent upon understanding who the affluent are, how to reach them, how they choose their Realtors, what they expect in a marketing plan, etc.  You must also understand how to market a luxury property using lifestyle marketing and the concept of “best prospects.”
  4. Know your inventory. 

How does one define luxury in the U.S. housing market?

At The Institute for Luxury Home Marketing (ILHM), we define luxury as the top 10% of a market’s residential sales (as determined by price) in the last 12 months, but never less than $500,000.   This formula recognizes market differences.  For instance, the top 10% in New York City may be in multiple millions of dollars, while in Dallas, it will be in the $500,000 range.  What you get for your money from one location to another differs, so we believe the definition of luxury should be specific to the marketplace.   


WSJ: Wall Street Bonuses and Where Are the Wealthy?

A couple interesting posts on the Wealth Report this week (hat tip to George Harvey).  

The first is peek at Wall Street bonuses which have seen some restructuring and are down from previous years, but not nearly as much as some might imagine.

Bonus

"One area where bonus spending remains strong is real estate. But bankers are redefining their ideas of a summer cottage. Rather than buying or renting 12,000-square-foot homes, they are downsizing to 6,000 to 8,000 square feet."

The second Wealth Report post asks the question, "Where Do All the Ultra-Rich Live?"  In a nutshell, more than half o the ultra-rich are found in the 5 most populous states of California, New York, Texas, Florida, and Illinois.  Not exactly a surprise.  Outside of the big five, they note that there is a broad distribution of the wealthy and that, "there are actually pockets of wealth in states that most people wouldn’t normally think of."  Again, perhaps not a big surprise, but also not a fact that everyone seems to be aware of.  He ends the post with the question, "Do you think the wealth map of the U.S. will change over the next 10 years?"  

The answer to this question will likely affect all of our businesses. 

Wealth


National Luxury Market Update

We've been seeing some interesting trends in the luxury market recently.  Our ILHM National Luxury Market Report provides a snapshot of the luxury market at the national level, as well as more detailed views of more than 30 metro areas.  Here are the current national charts:

Price

Median price for active listings at the top of the market saw a strong downward trend beginning at the end of February.  This trend broke in September and we have seen general price stability since then as illustrated in the horizontal trending in the chart above.  Keep in mind that this is based on active listing data and that the changes may reflect both the nature of the inventory coming onto the market (e.g. more larger and more expensive homes) and/or the relative level of pricing or discounting.

Sept-20101-CS

It is a very different picture than we see in the overall (non-luxury) market which has seen decreasing prices for new listings since late summer.  Likewise the recent Case Shiller home price index report shows almost the opposite trends for the broader market as illustrated in the chart above.

 

PPD

Speaking of discounting, since October we've seen a decrease in the percentage of homes on the market that have lowered their asking price at least once over the previous 90-day period.  This would imply that perhaps more properties are coming onto the market priced appropriately, and/or that downward pressure on pricing may have eased a bit.

 

Inventory

As you might expect, we're seeing a drop in inventory levels consistent with the seasonal business cycle.  This reduction in available properties is likely adding some pricing support.  It also makes one wonder how much shadow inventory might be waiting on the sidelines.  To put this in perspective, and give you a better sense of the seasonality and relative inventory levels, here are the inventory trends for the last few years:

Inventory_long

As we all know, real estate is local.  When it come to pricing and selling a home, it is important to understand the trends that define the market in that location, at that price point, for comparable (or "relevant") properties.  National trends don't matter much.  That said, national trends can be a good indication of the overall health and direction of the "market" nationally and may correlate with local trends.  

Since economists and policy makers are often looking at national trends and the mainstream media's reporting is typically focused on national trends, they can have a strong role in shaping public opinion, consumer psychology, and client perceptions.  Because local trends at a given price point may be very different, this often creates an excellent opportunity for agents with real local market expertise to deliver some powerful insights and real value.  It is the key to identifying real opportunity.  As the folks at Altos like to say, "Beat the headlines.  Be the local market expert."  It works.