Gregory J. Heym
Executive Vice President, Chief Economist
Top 2% of Market Still Selling, As Overall Volume Falls; Interest Rates Not a Factor
By TROY MCMULLEN
May 19, 2006; Page W10
Despite growing indications of a cooling housing market, one niche continues to sell briskly -- multimillion-dollar homes.
Over the past few months in the overall U.S. real-estate market, more homes have crowded the market and sales volumes have fallen in areas from Houston to Boston and Washington, D.C. Freddie Mac, the government-sponsored provider of mortgage-loan funding, predicts total home sales this year will be down by about 7% from 2005's record levels. Yet one area of the market appears immune to all that: In many locations, homes on the ultrahigh end of the price scale -- those costing $3 million and up -- have been selling in increasing numbers.
In San Francisco, 18 homes in that range sold in the first quarter, up from 15 in the same period last year, according to real-estate information service DataQuick. In Jackson, Wyo., that number rose to 21 homes from 17, according to Jackson Hole Real Estate and Appraisal. Higher up the scale, 10 homes at $5 million or more in Palm Beach, Fla., sold in the first quarter, up from eight last year, says the county assessor's office.
One factor in the growth could be that median prices of all homes have risen, pushing more homes into the luxury end. Also, inventory is up across the board. But at a time when the overall number of home sales has declined in many markets, the number in the ultra-high range has continued to grow. One possible message: Just as it is often said that the rich aren't like the rest of us, the real-estate market of the rich appears to bear a decreasing resemblance to the one experienced by most Americans.
Paying in Cash
Homes at $3 million and up represent less than 2% of the overall market, estimates the National Association of Realtors. Activity at this small upper end has traditionally been a leading indicator for the broader market, says Gregory Heym, chief economist for the New York real-estate brokerages Brown Harris Stevens and Halstead Property. Now, he says, there may be less of a connection between the two segments. The stock market has created new wealth and the number of millionaires has grown, so more buyers are paying in cash. (The National Association of Realtors found that 8% of home buyers paid in cash last year, up from 6% in 2003.) That has left luxury buyers mostly insulated from economic factors such as rising short-term interest rates.
Mark Zandi, chief economist at forecasting firm Moody's Economy.com, says the segment of high-end buyers "won't be immune from the unfolding travails of the rest of the market, but it will weather those difficulties much better than it has historically."
Walter Molony, a spokesman for the National Association of Realtors, says the highly volatile high-end market serves as a poor market indicator. Activity among first-time home-buyers, he says, is more telling. "That segment provides liquidity for people to be able to trade up to larger homes," he says. "Without strong entry-level activity, the market would sink."
When Todd Michael Glaser listed his 11-bedroom Miami home in February, overall sales volume in the city was slipping -- sales fell 21% for the month over a year earlier. But he wasn't concerned. He listed it for $40 million, well above Miami-Dade County's record single-family home sale of $27.5 million in 1999.
Mr. Glaser, a 41-year-old real-estate investor, figured the property would sell based on its amenities and location. The 20,000-square-foot home is one of the biggest on North Bay Road, where neighbors include Billy Joel and Matt Damon. A month after hitting the market, it went under contract for purchase. Brokers with knowledge of the deal put the price at over $30 million, though Mr. Glaser wouldn't reveal the number. "It's not a property for the everyday home buyer," he says.
In Los Angeles County, 217 homes priced over $3 million sold during the first quarter, up from 114 during the same period last year, according to Cecelia Kennelly-Waeschle of Sotheby's International Realty. That is the biggest first-quarter jump since the firm started tracking sales in 1988. For the same period, the number of all sales in the county fell 10.3%, according to DataQuick. Two homes priced above $10 million sold in Santa Barbara, Calif., during the first quarter -- including a $28.5 million, 17-acre oceanfront property to actor Kevin Costner -- up from one a year earlier. (The data in this and other markets do not show how long the homes spent on the market or whether they sold at their original asking price.)
The Kravis Solution
Some affluent buyers don't limit themselves to what's on the market. When Henry Kravis, managing partner of New York-based Kohlberg Kravis Roberts, went shopping for a Palm Beach house in January, he didn't like any of the available properties. His broker, Lawrence Moens, identified a property that wasn't for sale, but fit Mr. Kravis's criteria: a 15,255-square-foot home on five acres along Lake Worth. "I just knocked on the door and said, 'I've got a buyer willing to pay a lot of money for your home,' " says Mr. Moens. A few weeks later, the deal closed for $50 million, public records show. Local brokers say it is the highest price ever paid for a non-oceanfront property there. Mr. Kravis declined to comment.
Not all markets are seeing a surge in high-end sales. In Manhattan, 212 homes priced above $4 million sold in the first quarter, from 226 in the year-earlier period, according to Brown Harris Stevens. Appraisers say that apartments are staying on the market longer.
Even where sales are falling, confidence hasn't always flagged. On the Nevada side of Lake Tahoe, sales of homes priced above $1 million fell 35% in the first quarter over a year earlier, according to Chase International Realty. That didn't stop Tom Gonzales from raising the price on his home in Incline Village, Nev. After staying on the market for a year at $60 million, he raised the price on the 4.5-acre property to $65 million last month, to account for the upkeep he's paid. "I don't think there's a shortage of people looking for a property like this," says Mr. Gonzales, 61, who co-founded software company Commerce One in the 1990s.
Yet in Fairfield County, Conn., Lake Forest, Ill., and San Diego County, brokers say many sellers are trimming prices amid a glut of pricey homes. Writer Jane Green and her husband, bank executive David Burke, cut the price of their Westport, Conn., property by $1 million after it sat for eight months at $5 million. Shortly afterwards, the property sold in January for $3.9 million, public records show.
Talk of a slowdown hasn't affected Sean Wolfington, a former Philadelphia Internet entrepreneur, who just outbid two other buyers on a six-bedroom estate in Key Biscayne, Fla., formerly owned by the singer Cher. The cost: $8.8 million, in cash. "Interest rates aren't a factor for me," says Mr. Wolfington, 34, who now runs an independent film company. "Waterfront properties like these are in limited supply. I saw this as an excellent buying opportunity."
Friday, May 19, 2006