On the Rise

In our exclusive outlook for the coming year, experts report that luxury real estate sales and prices should continue to build upon the significant gains of 2012.

By Camilla McLaughlin

This year, “sustainable” and “gaining momentum” replaced “bouncing along the bottom” in conversations with economists as housing’s meandering recovery finally began to make real strides. From Case Shiller to the National Association of Realtors (NAR) and CoreLogic, all the data portrays a picture of a broad national recovery. NAR projects existing home sales to rise 9 percent in 2012, followed by an 8.7-percent increase in 2013.

Even home building shows signs of revival. In the third quarter, Toll Brothers, a national builder focused on the luxury market, reported a 50-percent increase in revenue over the prior year. Additionally, the net value of signed contracts was the highest since 2006, up 75 percent from a year earlier.

For the first time since the height of the boom in 2006 (excluding the impact of the federal home buyer’s tax credit), home prices began to creep up nationally, with all three S&P/Case Shiller Indices showing more than six consecutive months of increases. Price projections for 2013 call for gains ranging from less than 1 percent to as much as 9.7 percent, depending on the institution and the economist making the forecast.

“2012 has been a great turn-around year for housing, with prices and sales moving beyond where we were last year,” says Margaret Kelly, CEO of RE/MAX LLC. “We’re ending the year the way we started it, with better than expected performance. If we can get more reasonable regulation from Washington, and if mortgage availability improves, 2013 will see a much stronger housing market.”

“I think 2013 will be a good year in real estate. I think the issue is the real estate market, and the economy in general, are moving steadily but not at the speed we want them to move. So, I don’t expect 2013 to be a gangbuster year, it’s not going to be 2005 all over again, but clearly it’s going to be a very solid growth year, and every year going forward for the next several will be stronger years for the economy, as well as for housing in general,” observes Earl Lee, CEO of HSF Affiliates LLC, which operates Prudential Real Estate, the Real Living Network and Berkshire Hathaway Home Services.

At year-end, positive indicators are many. Foreclosure activity has reached a five-year low, and the shadow inventory of potential foreclosures is being whittled down as well. Inflation still hovers, but most real estate economists expect it to hold off through 2013. Additionally, whether it’s concern about changes in taxes, uncertainty over equities or the world economy, a growing number of wealthy consumers are looking at hard assets like real estate more favorably than in recent years.

Pent-up demand was a catalyst in 2012 and is expected to continue to fuel sales going forward, particularly for luxury properties. “We have seen a resurgence in the upper-end because that segment of the buying population really understands values. They have watched the market correct, they have seen what’s taking place and they are saying ‘now is the time,’” observes Lee.

“High-net-worth individuals want to be cautious in times of economic stress. There is a certain level of patience, and then they want to make their move. They have a desire to get off the sidelines, and that has driven a lot of their real estate activities,” says Betty Graham, president of Coldwell Banker Previews International NRT.

“Buyers are back, and, most importantly, so is their confidence. They realize that now is a perfect opportunity to get back into the market after having sat on the sidelines for a few years,” explains Stephanie Pfeffer, executive vice president of Luxury Portfolio International.

The big wildcard at press time is potential changes in tax law. “The market improved in the second half of this year. As long as interest rates stay low, it will probably continue, but there is great concern about the raising of the capital gain tax and the elimination or reduction in deductions, especially those related to real estate,” observes John Brian Losh, publisher of LuxuryRealEstate.com.

Even though more than a few crystal balls are still a bit murky, not many observers would contest the assessment of David Blitzer, chairman of the Index Committee for S&P Dow Jones, that rising prices “are the first clear sign in these numbers that we are past the bottom, over the worst.”

“The real estate market in the spring and summer of 2012 was the strongest since the peak of the bubble. There is now strong evidence for a slow, sustainable recovery on both the supply side and the demand side,” says David Stiff, chief economist with Fiserv, a leading global technology provider serving the financial services industry.

“The difference from 2011 and early 2012 is that the housing market emerged into a recovery period. We have entered a new housing cycle that has showcased itself through a lessening of inventory, and an increase in sales and prices,” observes Budge Huskey, president and CEO of Coldwell Banker Real Estate.

 

Noting that momentum began in the first quarter of 2012 and continued to build throughout the year, Douglas C. Yearley Jr., Toll Brothers’ chief executive officer, cited “pent-up demand, rising home prices, low interest rates and improving consumer confidence” as motivations steering buyers back to the market.

Unlike prior years, this up-tick is not limited to a handful of locations. “The recovery is geographically broad-based with almost all markets experiencing some appreciation. Sand and energy states continue to experience the most robust appreciation,” observes Mark Fleming, chief economist for CoreLogic. But even areas with little or no appreciation show signs of stabilizing. Prices in CoreLogic’s December pending sales index for non-distressed properties were poised to rise 7.4 percent year-over-year, with increases in 45 states.

In Florida, sales of existing single-family homes statewide posted an annual gain of 25.3 percent in October. Estimates project median prices to increase from 7.3 percent to 9 percent statewide with high-demand markets tracking even higher.

In every accounting, Texas is experiencing one of the most robust recoveries, in part because of the boom in energy-related industries. Houston, Dallas and Austin rank among the best performing metros nationally. “We’re seeing a recovery in many markets. Houston is seeing a resurgent luxury market in both Houston proper and the North Montgomery area. ExxonMobil’s new campus — which will employ more than 10,000 high-income professionals — is creating a huge draw to The Woodlands,” one of the city’s platinum addresses, says Kathy Neu, president of Keller Williams Luxury Homes International.

Notable too is growing strength in the mid-to-upper price ranges nationally. “The high end is recovering nicely in many markets around the country — and not only in the major markets like New York, San Francisco and Dallas. Other areas that were hit harder are also showing great signs of strength and recovery in the high end in markets that are not exclusively luxury such as Cape Cod, Santa Fe and Milwaukee. Activity is by no means isolated to specific luxury markets or the coasts,” observes Pfeffer.

According to data compiled by Homes.com, almost all upscale markets showed an average monthly sales increase ranging from 5 to 54 percent. During the first half of 2012, the number of California homes selling for $1 million-plus rose to the highest level in five years, increasing by 18.5 percent year-over-year in the second quarter and outpacing the 10.3-percent gain in the overall market, according to DataQuick, a real estate information service that tracks luxury sales in selected markets. In Miami, homes priced between $200,000 and $600,000 posted a 19-percent year-over-year gain, while the number selling above $800,000 rose 21 percent. By September, Seattle had charted six consecutive months of price increases, which, according to DataQuick, reflects a pickup in activity in mid- to high-end neighborhoods. Seattle also ranks among the top 10 metros in Pro Tech Valuation Services’ December Home Value Forecast.

Price brackets most in demand vary greatly by market. For example, says Neu, “In Atlanta, it’s $750,000 to $1 million. In Beverly Hills, it’s $1 million to $2 million. In Manhattan, Russian billionaires are buying properties that are $50 million and up.”

In Naples, Fla., sales in the $1 million-plus category are up approximately 10 percent. Michele Peppe, with Coldwell Banker Residential Real Estate in Naples, attributes this increase to pent-up demand. “People watched the market closely and waited for prices to level off before making buying decisions. Both investors and end users have been active in this luxury market segment.” Remarkably, it’s still possible to find homes on the water with gulf access here for less than $1 million.”

With supply of for-sale homes down substantially — by as much as 29.1 percent nationally, according to RE/MAX data — a lack of good properties is constraining the number of transactions, particularly in strong markets where the run-up in sales has inventories dwindling to only a few months’ supply. “When high-quality, well-priced homes come on the market, they are being snapped up almost immediately — a significant turnaround from just a few years ago,” adds Pfeffer.

“I’ve been calling it a trickle-up effect for over a year now; as we run out of inventory in the lower price point, new listings are testing the market at higher prices — and due to the diminished inventory, many sellers are getting their prices,” says Peppe.

“Pent-up demand will continue to be a driver for sales in 2013. There are a lot of people on the demand side and the supply side waiting to see if the market is moving in the right direction,” says Gary Painter, director of research at University of Southern California’s Lusk Center for Real Estate. Painter expects demand to increase as more supply comes on the market.

Foreign nationals played a big role this year in Miami, California and New York. Agents say interest from foreign buyers is beginning to trickle into places that traditionally have not been global hubs. “Wherever you find strong job growth, low unemployment and major corporations, there’s going to be an influx of international money seeking opportunities for long-term investment,” observes Neu. For example, in Houston, she says, “We’re seeing an influx of Latin American and Asian buyers.”

Plus, Losh says, “America has always been considered as a safe haven, and it’s still probably the safest place in the world to put your money.”

Looking ahead, most experts expect to see little change in 2013, although many anticipate a potential hiccup until pending tax issues are resolved. “The elimination of economic and policy uncertainty is most needed in the upscale market,” says Huskey.

“People in that top income bracket are fearful that they are going to be hit hardest on the tax side,” explains Jim Gaines, an economist with the Real Estate Center at Texas A&M University. However, Gaines says the “Primary home market is going to do okay,” since prices and interest rates are still attractive. Purchase prices might shift a bit but, he says, “The fundamental demand is going to be there, and that market will probably remain active.”

Like many analysts, Gaines believes any lull, especially in the second-home market, will be a “Temporary moderation until people see the lay of the land, and then it will pick back up again by summer.”

Ultimately, real estate will still be viewed as one of the best investment vehicles. “We are in a world-driven economy,” explains Lee. As the world economy comes back, demand for natural resources will grow and, he says, “As a result, the cost of housing and the cost to build a house with increase. So, real estate is looked at as a hedge against inflation going forward.”

In Texas and elsewhere, Gaines says, “People with money are buying properties and buying land because they are afraid to put money in the stock market or the bond market or the commodities market.”

“Land or second homes in the medium-to-long run are going to be considered one of the better places to park money. If you are looking at Aspen, the Hill Country in Texas or waterfront on lakes or rivers, those kinds of properties tend to hold up because there aren’t many of them,” comments Gaines.

Although location, views and the overall experience of the property are as important to upscale consumers as price, the opportunity offered by current prices is still the most compelling aspect of today’s market. “For many, the time might be right for buyers and sellers to take their lives off of hold,” says Huskey.

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