As Luxury Market Soars, A Moment for Concern

Morguefile.com

Morguefile.com

Exceptional growth has been the storyline of the luxury real estate market the past few years. No other price segment has rebounded from the housing crash with as much gusto as that of million-dollar-plus homes, which are selling at twice the historical average. According to the National Association of REALTORS®, home sales above $1 million in 2014 grew nearly 9 percent over 2013 — more than double any other price point. And the conservative expectation is that luxury sales will at least repeat that performance this year. Nearly every major city — if not all of them — shattered its record for most expensive residential sale in the last year, and each one has a listing today that, if purchased at asking price, would break it again.

There’s no doubt the industry has a lot to celebrate because of the roaring success on the top end of sales. But underneath that fanfare appears to be a little bit of nervousness that only a few will openly — or even hesitantly — admit. Is the upward trajectory of high-end sales and prices rising too fast?

At the Asian Real Estate Association of America’s Global & Luxury Summit in Chicago this week, the theme was clearly that real estate professionals should jump on the opportunities presented by the soaring luxury market. The conference was mostly tips for how to enter the high end of your local market and serve wealthy buyers’ needs, as well as the outlook for luxury sales going forward. It was on this latter point that a few glimmers of concern shown through at various sessions.

During a presentation by top luxury producers around the county, the panel was asked by an audience member where they thought the luxury market was going in the future. Craig Hogan, director of Coldwell Banker Previews International in Chicago, answered this way: “We want to see the luxury market go up, but we don’t want to see it go up so fast that then it drops. We hope it keeps doing what it’s doing without a bunch of spikes.”

On the same panel, Robert Canberg, a salesperson with Nest Seekers International in the Hamptons on Long Island, said his tony area’s average sales price last quarter was around $2 million, up more than 30 percent year-over-year. Another panelist, Ivan Sher, partner-broker with the Shapiro & Sher Group in Las Vegas, said the number of home sales above $1 million in the city was 19 in January of this year alone, up from 8 in January 2012.

These are, of course, market conditions in only two areas, but against a sea of headlines proclaiming an unprecedented heating-up of luxury sales around the country — San Francisco, Atlanta, Nashville, Boston, Miami — it’s clear that the spikes are already beginning to happen. What no one knows is if or when the drop will come. That’s incredibly difficult to predict.

However, another potentially alarming bit of information: During the opening general session at the AREAA summit, NAR Chief Economist Lawrence Yun said that the rising value of the dollar could make foreign buyers pull back on real estate purchases in the U.S. Foreign buyers have been responsible for a large percentage of high-end sales in these years of the fast-and-furious recovery of the luxury market. If they go away, are there enough buyers here who can sustain the price growth?

Even realtor.com® Chief Economist Jonathan Smoke showed a slide pinpointing the correlation between the U.S. dollar and homebuying demand from international buyers. Beginning in November of last year, the dollar took a sharp turn upward in value, and at the same time, the number of non-U.S. visitors to realtor.com® drastically declined. Pair that with Yun’s statement at the conference that “there is still some uncertainty and risk consideration about where the U.S. is currently. It’s not necessarily the  best of times,” he said, noting that GDP growth in the U.S. is expected to “fizzle” this year, though he attributed that to “one-time factors” without elaborating.

That, of course, isn’t enough to say that doom and gloom is on the horizon for the luxury market or the market as a whole, but it’s something to take note of.

Economists started to say last year that the potential for another housing bubble was present, but no one would go so far as to say it was actually happening. No one can say that now, either, but it’s worth noting that eerie signs — whether it speaks to a bubble or not — are popping up. And they’re starting to be acknowledged by some in the real estate community.

Graham Wood

Graham Wood is a senior editor for REALTOR® Magazine. He can be reached at gwood@realtors.org.

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Comments
  1. “Foreign buyers have been responsible for a large percentage of high-end sales in these years of the fast-and-furious recovery of the luxury market. If they go away, are there enough buyers here who can sustain the price growth?”

    I hate to say it, but I don’t think there will be enough buyers to continue to the price growth if foreign buyers begin to drop in the U.S. sales. I do believe that we will start seeing a decrease in foreign investors.

  2. What makes you say that, Caleb? What do you think would cause the drop in foreign investors? They haven’t yet (feel free to correct me here), so who’s to say they will. If there’s nothing to indicate that it may happen, then why not be optimistic about it. 😉

  3. CIPS Realtor

    Julia: What Caleb says makes sense, especially in a world economy where the value of the dollar is rising. More expensive dollars mean more expensive properties in the U.S. If foreign investors looking for a monetary return or a comfortable lifestyle can get more for their money elsewhere they may very well do just that. The one portion of the international market that may hold up under any conditions is the foreign student market — wealthy parents abroad who send their kids to school in the U.S. always see value in owning their place of residence instead of renting or throwing away money on a dormitory space.

  4. Despite his forecasted increase in sales, Yun cites the anticipated rise in interest rates, lenders being slow to ease underwriting standards back to normalized levels, and homeowners unwilling to move because they are comfortable with their current low interest rate as potential speedbumps that could slow the increased pace of sales this year.

  5. The real estate market is still volatile, we need be extra careful how to approach this. Banks/Owners still need to make money and there are still an abundance of buyers but this needs to be regulated better where we don’t have another housing bubble.

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