Unique Homes Blog

By Camilla McLaughlin

It’s going to be a long road back to the top for luxury real estate. In some areas, the journey has begun. In others, we’re still “skimming along the bottom.” We asked the country’s real estate leaders what we should expect to see in 2010.

What to expect in 2010:

• Expect a higher level of consumer confidence.
• Prices should remain flat.
• The very top of the market should be relatively active, especially with top properties in premier U.S. resort markets and top penthouses in major metros.
• Look for more foreclosures and short sales in all price ranges.
• If banks ease access for jumbo loans, look for the market to jump start.
• If unemployment stays high, look for the housing recovery to stall.

The past is usually a good guide for the future, but as 2008 transitioned to 2009, it was clear we were in uncharted territory. Everyone’s crystal ball got a little hazier.

The year began with consumers dazed and confused, the economy reeling as the stock market plunged, financial institutions teetering on the brink of collapse, unemployment and foreclosures continuing to skyrocket and home sales slowing to a standstill as the recession deepened into the worst economic crisis since the Great Depression. By the fourth quarter it was evident that a recovery had tentatively begun.

“We are pretty clearly in recovery now. I don’t think we are going to double dip on this. It will be pretty consistently upward. A weak recovery will continue to be a weak recovery because of jobs,” says John Tuccillo, Ph.D., former chief economist for the National Association of Realtors, who expects to see sales grow to 5.5 million in 2010, a slight increase from the 5 million projected for 2009.

Still, uncertainty hovers over the economy and housing. What isn’t clear is “what’s going to lead us out of the recession. What part of the economy is going to really recover and be the leader and bring the rest of the world up with it? Historically, that’s been housing and that’s not happening in this go-round,” says Jim Gaines, Ph.D., an economist at the Real Estate Center at Texas A & M University.

Still, real estate remains fundamental to any recovery. “The real estate market is a game changer. It’s not coincidental that the U.S. economy has improved as residential real estate has improved,” says Earl Lee, president of Prudential Real Estate and Relocation Services.

For luxury real estate, 2009 proved to be the most challenging year of the decade with sales below the $2 million price point generally stagnant, constrained by the unavailability of credit and few move-up buyers. Homes priced above $750,000 represented 4.4 percent of total home sales in 2007. By 2009, luxury properties represented about 2.3 percent of the total, according to Laurie Moore-Moore, CEO and founder of The Institute for Luxury Home Marketing.

Even so, as the year progressed, consumer confidence grew. “Our consumer studies show the outlook of affluent consumers has changed dramatically during 2009. The first quarter was very dim, in fact the dimmest in years, but by the second quarter it was definitely on the upswing,” says Paul Boomsma, president of the Luxury Portfolio Fine Property Collection at Leading Real Estate Companies of the World. Between the first and second quarters, the number of affluent consumers in the market for real estate increased by 50 percent, he says.

“We are seeing increased activity in the higher ends of the luxury market in places like Los Angeles and South Florida. This is a direct result of the stock market increases and the increased confidence the affluent have in the economy,” reports Jim Gillespie, president and CEO of Coldwell Banker Real Estate.

“Next year is going to be a slow process of coming out of this recession. We’re going to see more stabilization in the coming year,” and therefore a higher level of confidence, says Mike Good, CEO of Sotheby’s International Realty Affiliates LLC.

Spring Thaw
For real estate overall, the thaw came in April when sales began to inch up. September’s volume hit a two-year high and the supply of homes on the market declined to 7.8 months, down from 10.1 months a year earlier. Distressed properties accounted for 29 percent of all transactions in September. As buyers whittled down the inventory of foreclosures and short sales, markets in parts of Texas, Louisiana, the Dakotas and the Carolinas seemed to be on the rebound.

Prices in the Case Schiller Index, which tracks residential real estate values in 20 metropolitan areas across the country, also began to edge up, month over month, beginning in February. However, when compared, year-over-year prices are still significantly down. According to the Index, home prices across the U.S. are at levels comparable to autumn 2003. The good news is the pace of decline is slowing, with cities such as Denver and Dallas edging close to positive territory in August. Both New York and San Diego emerged out of double-digit declines. New York was down 9.6 percent while San Diego was down 8.9 percent.

Also, it is important to remember that sales and price data are not forward-looking indicators, so August’s figures reflect contracts written in June, possibly even earlier, rather than current sales.

Spurred by the first-time homebuyer tax credit, sales activity was concentrated in the low end with first-time buyers accounting for 45 percent of all home sales. Demand for anything below $250,000 was especially strong and reports of bidding wars were not uncommon. However, these sales sparked little momentum in other price brackets. Noticeably absent were move-up buyers. The high number of distressed properties sold means few sellers moved on to purchase other, higher-priced homes.

Motivating Move-up Buyers
“All aspects of real estate have an impact on the other segments, and luxury is no different. Essentially, the luxury segment is just as vital to the health of the real estate market, as are first-time home buyers,” says Kathy Neu, president of Keller Williams Luxury.

Putting a damper on sales above $750,000 are difficulties obtaining jumbo loans, which even consumers with excellent credit and sizable down payments are encountering. Those who can get a jumbo loan typically are paying rates that are 1 to 2 percent higher than conventional loans. “I think you would see a quicker recovery in housing if jumbo loans were at a reasonable rate,” adds Margaret Kelly, CEO of RE/MAX International.

“As economic confidence increases, we hope that there will be less fear among banks and more access to jumbo loans. This will, without a doubt, jump start the market,” Neu says.

Another noticeable change this year has been consumer values. “Consumers have lived through the worst time our country has seen since the Great Depression and will be very cautious and very conservative with their expenditures. Frugality is in,” observes Gillespie.

Today, affluent consumers “are looking at the whole value proposition,” says Boomsma. He says potential buyers will evaluate the experience a property brings, how it enhances their life and what it costs in terms of time and dollars.

Skimming Along the Bottom?
As this year’s Outlook goes to press, the Dow is flirting with 10,000 and some financial institutions are flush enough to hand out bonuses, but the CIT Group filing for bankruptcy was a reminder that any recovery will be rocky. An analysis by Moody’s Economy.com saw recoveries taking shape in some local economies with the recession moderating in all states except Nevada.

Officials may have pronounced the recession over but the cheering is subdued. “What we’re seeing right now is the economy is not going to recover until housing recovers and housing is not going to recover until employment recovers,” says Kelly, who believes we’re currently “skimming along the bottom.”

Real estate experts are looking ahead cautiously, citing another potential wave of foreclosures (as a huge number of adjustable-rate and interest-only mortgages reset) and ongoing credit issues as potential roadblocks to any sustained recovery. Expect to see more foreclosures and short sales in all price ranges, including luxury from ALT A and Option ARMS due to reset this year. Brands such as RE/MAX as well as Moore-Moore’s Institute have been training agents to help high-end homeowners who may be in these circumstances.

Like most, Good doesn’t expect to see any significant rebound going into 2010. “My feeling is that it is going to be reasonably flat from year to year,” he says.

Internationally, luxury has had a stronger rebound than in the U.S. and the weak dollar is making U.S. real estate very attractive to foreign buyers. “Look for premier U.S. resort markets, prime marinas, and the top penthouses in major metros to have some activity at the very, very top of the market,” especially in areas with international appeal, observes Moore-Moore.

“When the world’s economies begin to recover, wealth building will quickly gear up again and more money will flow into luxury real estate. Once the rebound in luxury starts, it should accelerate quickly,” says Moore-Moore.

Industry Wants Credit Without Limits
The U.S. Senate has extended the first-time-buyer tax credit through April 30, 2010, and will also offer a $6,500 credit to move-up buyers. Both are limited to homes costing $800,000 or less with first-time-buyer incomes capped at $75,000 for individuals and $150,000 for couples. Income limits for move-up buyers are $125,000 for individuals and $225,000 for couples. Move-up buyers must have used the home being sold as a principal residence consecutively for five of the previous eight years. Another plus, especially for upscale home sales, is the extension of the current high limits on FHA loans in high-cost areas through the end of the year.

Many in real estate argue that a tax credit without a cap on income or home price would be most effective in stimulating the entire housing market, resulting in potentially 600,000 new sales next year. According to
the National Association of Realtors, that would mean $37.8 billion ($63,000 for each sale) pumped into the recovering economy.

The first-time homebuyer tax credit was effective at stimulating sales but it didn’t create “the ladder of sales (the upward momentum), which has been the mainstay of real estate forever,” says John Brian Losh, publisher of Luxuryrealestate.com and owner of Seattle’s Ewing & Clark. “We should have encouragement for all people to enter the real estate market regardless of what type of a market or what type of a house they want to purchase.”

Add this to your social network: