Unique Homes Blog

Luxury home sales were up throughout 2010. But the road to overall housing recovery has not been smooth. Economists fear lingering uncertainties will bring much of the same in 2011.

by Camilla McLaughlin

It’s been a bumpy ride and it’s not over yet.

The beginnings of a recovery finally came in 2010, but the road back from the most severe and longest recession since the Great Depression is painfully slow and halting. For much of 2011, experts say we can expect more of the same with economic growth hovering at or below the 2.7-percent real GDP growth projected for 2010.

“Bumping along the bottom” is a favored phrase many economists use to illustrate the protracted phase between downturn and a sustained recovery. Nothing could more accurately describe 2010. “Compared to other downturns, this correction is a lot tougher and steeper because we went up a lot further and a lot faster,” says Earl Lee, CEO of Prudential Real Estate.

Unlike most post-WWII recessions, housing is not going to be the engine powering the recovery. The key to a sustained recovery lies with unemployment and the economy. Once these begin to improve, says Jim Gillespie, CEO of Coldwell Banker Real Estate, “housing should take over and move us out of this. It’s going to be a slow process.” Lawrence Yun, chief economist for the National Association of Realtors (NAR) projects 1.5 million additional jobs over the next two years with the unemployment rate decreasing to 8 percent by 2013 and a return to a normal level of 6 percent in 2015.

The year began with the stimulus dollars finally taking effect, boosting the first quarter real GDP growth to 3.7 percent. Even broader tax incentives and low interest rates continued the jump-start real estate received in 2009 from the first-time-buyer tax credits.

By mid-year, the recovery seemed to falter with real GDP growth falling back to the 2.0-percent range and lackluster job creation doing little to remedy unemployment. Home sales plunged 25 percent following the expiration of the tax credits. Another bump came from the financial crisis in Greece. Economists upped the probability of another recession. Yet, by early November, promising leading indicators, including a slight upswing in consumer confidence and modest job creation in the private sector, confirmed that although the recovery might be slow and halting, it was still underway.

“The direction of the economy changed after the first quarter,” observes Kermit Baker, chief economist for the American Institute of Architects. “It looks like we have averted another significant downturn in the broader economy, but not in housing.”

Other economists, including Celia Chen at Moody’s Economy.com, echo Baker’s “double dip” assessment of housing. Also, says Yun, “Tight credit and appraisals coming in below a negotiated price continue to constrain the market.”

Economists such as David Crowe, chief economist for the National Association of Homebuilders, estimate we are only halfway through the inventory of distressed properties, which will continue to dampen prices in the coming year.

The wildcard in everyone’s forecast is the moratorium on foreclosures. “The halting of the foreclosures is a bit of an issue that is creating an unknown today. We don’t know how to quantify that right now. Any kind of a market doesn’t like uncertainty and that is an injection of uncertainty,” observes Philip White, COO of Sotheby’s International Realty. “We think real estate has clearly bottomed out at this point.” White expects consumer confidence to grow as 2011 progresses. But, he adds, “I do think the caveat is we have to get this foreclosure thing resolved.”

The most positive real estate story of 2010 was the resurgence in luxury. “The market segment which has seen growth in the number of transactions in 2010 is the over $1 million price point. This is true nationally and in every region,” says Laurie Moore-Moore, CEO and founder of The Institute for Luxury Home Marketing.

After being almost frozen for much of the prior year, sales of $1 million-plus homes increased by 46.9 percent in January and continued to chart year-over-year increases every month thereafter. Some of the numbers, such as the 77-percent increase in sales in May, appear dramatic, but it is important to remember comparisons are being made to a period in which there was little or no activity.

“Sellers are becoming more realistic, which means inventory is beginning to move and prices are down significantly,” says John Brian Losh, publisher of LuxuryRealEstate.com, who believes it will take several years for the market to gain strength. “But the fact of the matter is the tide rises and lowers at the same rate for everybody. It is a good time to buy and not a bad time to sell if you price your home right.”

“This economic cycle has created a real opportunity for some buyers that find themselves in a position to buy a property that has never been available before,” says White. Not only has a healthy dose of affordability been injected into the upscale market, but this year has seen a large number of unique special properties that ordinarily have not been on the market.

“This is the perfect storm for someone who wants to move up,” says Abby Lee, vice president of Brand Marketing for RE/MAX. And the real silver lining in the recession, according to Lee, can be found in prices and interest rates that make trading up more affordable than ever.

The big story for luxury in 2010 will be changes in interest rates on jumbo loans, says Gillespie. By the end of 2009, it was almost impossible to get a jumbo loan. “Today, there is mortgage money and the differential in the rate is a little more realistic,” adds Lee. Although prices garner the most attention, interest rates play an even bigger role in the cost of a property. “You only think about price twice — when you buy and you sell; but you think about payments every month.” A $10,000 difference in price amounts to only a small hike in monthly payments, but a point change in the interest rate is huge, he explains. With interest rates at a level comparable to 1951, Lee says this is the time to buy. The second round of quantitative easing from the Fed should continue to keep rates down, at least for the short term.

The smart money knows this is the time to buy, said Alex Perriello, president and chief executive officer of the Realogy Franchise Group, speaking to an audience at NAR’s annual conference in early November.

The availability of mortgage money is only one of several fundamentals energizing the upscale market and it should continue to power sales well into 2011. “The number of money millionaires (those with $1 million or more in investable assets) has rebounded after the drastic decline of 2008. In addition, we’ve seen a recent rebound in consumer confidence on the part of the affluent. A growing number of wealthy who are feeling better about the economy (or better about their own portfolios) bodes well for luxury,” observes Moore-Moore.

“The wealth market is going to rebound sooner and is going to come back different than it was,” says Paul Boomsma, president of Luxury Portfolio at Leading Real Estate Companies of the World, noting the wealthy overall have come out of this surprisingly well. However, he says it has forced them to “become savvy shoppers. Their core middle-class values have resurfaced and the focus is on quality and value.”

“Homes and condominiums with unique features and full amenities” are most in demand nationally but especially in markets such as Chicago, according to Kathy Neu, president of KW Luxury, Keller Williams Realty. “We’re seeing that great value is key, regardless of the price bracket. McMansions with giant taxes are not what people are interested in now. Rather, they want tasteful, quality construction with great amenities and a desirable location. They really are the priorities that buyers have set in today’s market. There is still a lot of luxury inventory sitting idle across the U.S.”

At press time, White is seeing a slowdown in upscale sales from the pace of earlier this year. A season slowdown is not unusual in this niche. But, he says, “As I travel around, there is still great activity and still great properties available.”
And the big luxury story of 2011? “China! China! China!” chorus Laurie Moore-Moore and others. “The growing numbers of affluent Chinese already make them significant players in the luxury travel and high-end consumer goods categories. Watch for them to move into U.S. and Canadian luxury home markets in 2011,” says Moore-Moore.

In most discussions of real estate, the notion of pent-up demand finds its way into the conversation. The recession dramatically slowed the rate of household formation. Home building is also at an all-time low. Once the economy and unemployment move closer to historic trend levels, expectations are the demand for housing will surge as owners and prospective owners who put their housing plans on hold move back into the market, purchasing both primary and resort homes.

A Good Year for Luxury Goods

Luxury spending overall staged a strong comeback in 2010.

Leading luxury brands such as the LVMH group, Moët Hennessy Louis Vuitton, reported a strong increase in sales in 2010. The group sees revenue growth of 14 percent in the third quarter as continued confirmation that the upswing in luxury sales observed since the start of the year is continuing. Burberry, the U.K.’s largest luxury retailer, reported similar figures with an 11-percent increase in sales between June and September.

With the brands doing well, it is no surprise to see the stores that sell them doing equally well. Luxury department stores were the strongest performing retail segment tracked by the International Council of Shopping Centers, posting a 6.4-percent gain in October.

According to research from Bain & Co., sales of luxury goods could rise to $236 billion in 2010. Although 2010 sales are up from the 19-year low charted in 2009, those tracking luxury spending believe demand overall might soften a bit in 2011, but not return anywhere near the lows experienced in 2009.

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