Wondering what the new year
will bring to the luxury housing market?
We are guessing it will look a lot like last year.
Five years ago the recession
sent the U.S. housing market into a tailspin. Happily, 2012 appears to have
been a turnaround year for the residential market; however, the recovery can
still retreat into a false start due to financial and political issues --
including the uncertainty created by deficit issues, an expected increase in
the capital gains tax, and the Dodd Frank Act (which sets new mortgage
standards as of January).
The luxury home segment has
led the recovery, beginning in 2011 in many markets. One major driver of luxury market activity has
been the increase in the number of wealthy U.S. households. The start of the recession saw the number of
High Net Worth Individuals (HNWI) -- those with a million or more in investible
assets, not including their personal residence -- drop dramatically.
Consequently, the luxury home market cratered. However, this affluent group
recovered their wealth quickly and many focused on residential real estate as a
desirable asset. For some, a second or
third home was both a lifestyle purchase and a portfolio play. Record low interest rates and the perception
of bargain home prices were also purchase motivators for the affluent.
As a result, the luxury
market in many areas enjoyed increased activity in 2011 and in 2012. For instance, California is often considered
a bell weather state and it was one of the hardest hit geographic areas in the
downturn. According to DataQuick, in the second quarter of 2012, million dollar
home sales in California were up 10.3% above the same quarter the previous
year. This was the highest level of
million dollar sales since the third quarter of 2007. One of the strongest luxury market recoveries
occurred in Miami where, according to Knight Frank stats, the luxury home
segment saw a jaw-dropping 35% price increase over a two year period ending in
September, along with declining inventory levels.
While U.S. luxury purchasers
are active, a major driver of the luxury market is the wealthy international
buyer. Foreign demand for U.S. homes has
grown, as has the diversity of the foreign buyer prospects. The factors which
influenced foreign luxury home demand in 2012, are still at the top of the list
as influencers for 2013.
creation. As wealth rises,
especially in emerging countries, the number of prospects shopping for prime
residential properties grows.
flight to safe haven. The U.S. is
considered a stable, safe place to invest.
For those who wish to move assets out of their home countries, the U.S.
has special appeal. For some, physical
safety for themselves and their families is also a consideration.
fluxuation. Although home prices
slipped when we went into recession, the home price decline is aggravated when
some currency exchange rates are considered.
In short, the bargain prices brought by the recession were discounted further
for some foreign buyers.
desire to own prime property and enjoy a desirable lifestyle. Lifestyle is a powerful motivator. Trophy homes in desirable areas have great
appeal and supply is limited.
Where foreign buyers come
from depends upon the market.
Brazilians, Venezuelans, and Argentinians continue to flock to Miami
along with Germans and Italians.
Australians and Brazilians are boosting the Aspen market. Russians, the British and French are joining
Wall Streeters in the New York Hamptons. Watch for Chinese buyers at the very,
very top of the U.S. luxury market, especially in New York. Eastern Europeans are also popping up as prospects
in some U.S. markets. Across all price
points, Canadians still rank as the number one foreign buyers, followed by the
All in all, without a fall
off the U.S. debt cliff, a tidal wave from the Euro crisis, or an unpredictable
black swan event, the luxury home market should continue to be healthy (and
perhaps even grow) in 2013. If you are wondering just how big this market
segment is, the $500,000 and above market represents 10% of sales and the $1
million and above market is about 1.6% of sales. Luxury is a small, but desirable market niche
and this is a good time to fine tune your luxury strategy or target the luxury
segment if you aren’t already.