Unique Homes Blog

The high end continues to lead a muted comeback, but for how long? The economy may hold the answer. But whatever happens in the short term, one thing is clear: luxury consumers are adjusting to a new norm.

Months have passed since the Great Recession was officially pronounced “over,” but as 2010 slides into fall, uncertainty over whether the recovery can be sustained persists. At the same time, luxury remains real estate’s top performer, with sales continuing to gain momentum and a growing number of potential buyers actively searching for primary and secondary homes.

Questioning the vitality of the recovery at this point is not unusual, says Mark Zandi, chief economist at Moody’s Economy.com. “This business cycle is different in many obvious respects from all the others, but the one constant is that our economy’s underlying strengths will ultimately prevail.”

Still, Zandi and other economists recently tweaked near-term outlooks. “With unemployment so high and policymakers increasingly perplexed over how to respond, the risks to the recovery are rising again,” he noted in a mid-year revision to his outlook that narrowed the odds of a double dip recession from one in five to almost one in four. Even these odds come with caveats, such as the extension of emergency unemployment benefits through 2010 and the assumption that Congress and the administration will be able to “forestall most of the tax increases now legislated to take place at the start of 2011.”

Upscale Sales, Full Speed Ahead

Although the number of transactions is still below the historic highs of the boom, luxury sales have been steadily gaining momentum, a trend that began at the end of last year in some locales. The most recent data from the National Association of Realtors shows May 2010 sales of $1 million-plus properties were up 77.3 percent over May 2009. Already this year, benchmarks for highest-priced properties have been set and broken with the $46.5 million sale of Colorado’s Bootjack Ranch this spring followed by Le Belvédère in Bel Air, Calif. At press time, the Le Belvédère price remains undisclosed but reportedly it is well above the plateau established by Bootjack.

“Sales have picked up from the same period last year pretty much across the board, including land, which is a good sign. Typically land is the last thing to come back and it is a good sign that builders are beginning to plan to build again,” says Steve Roney, president of Prudential Utah Realty.

Even in South Florida, high-end spec homes are being constructed in choice waterfront locations. Also, sales of land are returning here as well, often double lots for custom homes on or near the water, according to Joseph Ligouri, managing broker of Premier Estate Properties in Boca Raton, Fla. At the Ford Plantation, an exclusive resort community outside Savannah, Ga., spring brought a flurry of sales, including six homesites.

Resort properties overall have staged an especially strong resurgence this year. On Cape Cod, Paul Grover, co-owner of Robert Paul Properties, is seeing a 56-percent hike in sales over last year. In Park City, Utah, where the average price for a home is $1.3 million, sales are up 43 percent year over year. In Lake Tahoe, the upswing in luxury began in the last six months of 2009 and continued in the first half of 2010. “We are looking forward to what the last half will bring,” says Shari Chase, CEO of Chase International in Lake Tahoe.

Also benefiting from the luxury boost are resort and second-home markets in hard-hit states such as Michigan. Dan Elsea owner of Real Estate One in Traverse City, Mich., saw an uptick in sales when the gun went off in May and June for the prime buying season in the northwest corner of the state, a favored destination for Chicago and St. Louis denizens.

“It’s coming back. It’s going to be a good year, relatively speaking,” says Mike Riggle, owner of RE/MAX Irish Hills in Manitou Beach, Mich. The region is a second-home haven for residents of Detroit and Toledo, Ohio.

A year ago, potential buyers looking at Oil Nut Bay, a new upscale resort on Virgin Gorda in the British Virgin Islands, were not ready to do anything more than gather information. This year, they are actively searching, engaged in the process and ready to discuss pricing, says Michael Lorrance, vice president of marketing and sales for the developer, Victor International.

Affluent consumers once again perceive real estate as a solid investment and the number of individuals able to acquire multimillion-dollar homes bounced back to where it stood at the end of 2007. The most important catalyst has been growing consumer confidence. “Uncertainty is the most paralyzing thing for people and that’s what caused the halt in purchases. We’re beyond that now and people are starting to come back into the market,” says Steve Dering, a founding partner of DCP International, a Park City, Utah, firm specializing in the design, marketing and sale of
Equity Residence Club developments.

Still, a change in attitude on the part of both luxury buyers and sellers can’t be discounted. Recent research from the Luxury Portfolio Fine Property Collection at Leading Real Estate Companies of the World reveals the wealthy are feeling more secure and “more positive about the economy and the future in general.”

Well on the Way

The first story in our Road to Recovery series discussed the new normal for luxury. Recent sales as well as aggressive price cuts show many affluent consumers understand the days of the boom are long gone. Rather than looking back, savvy sellers today understand the dynamics of the market in 2010. Going forward, “people have to adjust their expectations just like the market has adjusted. This is kind of the new normal,” says Grover.

This acceptance sometimes translates into a reinvigorated inventory of homes on the market and exceptional opportunities. In 2008 and 2009, many potential sellers in resort areas in Michigan were still holding on to the belief that the market would return to the highs of the boom in the not-too-distant future. “Now it’s evident this market is pretty well entrenched. The reality is we’re in a trough and we’re going to stay in this down part for awhile,” Riggle says.

Another catalyst is a growing awareness that today’s opportunities may not be there tomorrow. Last year, anyone passing on a property could reasonably expect to find a similar comparable home in the future. Today, most buyers “aren’t quite as complacent,” observes Grover. “They’ve heard about friends losing homes they wanted so they are ready to make a decision.”

“The feeling I get is the American people are getting tired of sitting on their wallets. Americans want to spend, want to enjoy themselves and want to take their families to do things,” says John Dixon, who originally hails from the United Kingdom. Dixon is the sales director for El Corazon de Santa Fe Private Residence Club, which offers both whole and fractional ownership.

Relationships, not Residences

At the heart of the new normal are new luxury values. The consciousness of the nation is shifting to one that is relationship driven rather than one driven by materialism, observes Chase.

“It’s not just about acquiring a trophy property,” comments Paul Boomsma, president of the Luxury Portfolio Fine Property Collection at Leading Real Estate Companies of the World. “Today, the luxury consumer is more grounded, realistic,” and reevaluating the value of everything in their life, he says. Rather than uber luxury, consumers are purchasing homes that will fit the lifestyle they want for their family, and often that translates into location, property size and the comfort it affords.

Looking ahead, nothing could be a better foundation upon which to build real estate, and especially luxury real estate, for the next decade. However, for luxury and real estate in general, several red flags suggest the near-term prospects are not without potential snags.

“Many factors are still weighing heavily on the (housing) market,” says Nicolas Retsinas, director of the Joint Center for Housing Studies of Harvard University. “Elevated vacancy rates, record foreclosures, the expiration of the homebuyer tax credit and continued high unemployment are all causes for concern.”

A myriad of problems related to lending continue to put a damper on sales. Stellar candidates sometimes don’t make the cut with mortgage companies or the property doesn’t appraise for the sale price. In some locations, issues with appraisers being unfamiliar with the location, local values or upscale properties haven’t been resolved. The good news is that rates for jumbo loans are coming into line with mortgages in general and overall mortgage rates have never been cheaper.

The expectation of housing economists such as Douglas Duncan, chief economist for Fannie Mae, and Stan Humphries, chief economist for Zillow.com, is that the bottom for prices will come in the third quarter of this year followed by an extended period with little or no price appreciation. That’s good news for real estate overall. There is still a huge inventory of foreclosed homes to hit the market, but at press time the number of foreclosures seems to be moderating slowly.

“I am still cautiously optimistic about the second half of the year. The one thing we know, there is a tremendous amount of money on the sideline. The pendulum is swinging back toward that investment in real property. You can still touch it and use it,” says Roney.

Let’s Not Forget Fractional Ownership:
Is It The Best Option or Just Good Enough?

Like vacation homes in general, the uptick in activity for fractional ownership, especially private residence clubs, began last fall. A good example is the Phillips Club in Manhattan (pictured), where sales from November through March exceed the entire prior 18-month period. For affluent homeowners today, lifestyle trumps appreciation. And with prices projected to wobble around the current lows, more owners are finding fractional ownership’s cost-commensurate-with-usage model aligns with luxury’s new values.

“We have been the fastest-growing segment of the vacation home market for six years. That’s a significant statistic for those who wonder if this is going to perform like real estate. Overall, residence clubs have actually performed better than whole-ownership in each location,” says Steve Dering, who pioneered the residence club concept with the Deer Valley Club decades ago.

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