strong>Our annual look at the prospects for U.S. luxury real estate in the coming year sees a fragmented recovery, with steady improvement at the high end.

By Camilla McLaughlin

In an increasingly uncertain world, real estate is emerging as one of the few sure things. We’ve seen a growing reversal of sentiment regarding real estate. Scarcely two years ago, buying real property seemed the biggest gamble in town. Today, especially for the wealthy, real estate is emerging as one of the few sure things. Prices at historic lows translate into once-in-a-lifetime buying opportunities, whether computed by dollars or the ability to acquire a platinum residence in a prized location. Tired of watching and waiting, with a keen eye toward value, a growing number of affluent consumers are ready to jump back into the market. In 2011, a number did, and these fundamentals, along with uncertainty in both the stock market and global economies, make the outlook for luxury real estate in 2012 at least as good as — but perhaps better than — 2011.

Affluent buyers are viewing real estate as a good long-term investment at current prices and an attractive alternative to the volatility of the stock market, observes Rick Turley, president of Coldwell Banker Residential Brokerage for Northern California.

“While affluent consumers are watching to see what will happen with the global economic situation, many seem concerned that they will miss out on low prices and low interest rates and they are tired of putting purchases on hold,” says Laurie Moore-Moore, founder and CEO of The Institute for Luxury Home Marketing. “Some are still shifting dollars from other investments into residential real estate in the belief that long term it will be a good investment.”

LOOKING BACK
Blockbuster sales such as the $85 million Spelling Manor in Holmby Hills, Calif., or the $100 million mansion in Los Altos Hills, Calif., generate headlines, but the real story of luxury real estate in 2011 can be seen in high-end markets all over the country. In Sarasota, Fla.: “Our inventory is at record low levels, down to pre-2005 levels,” observes Michael Saunders, founder and CEO of Michael Sanders Company. In Atlanta: $1 million-plus sales increased by 24 percent in the third quarter while days on market went down 26 percent. In the Hamptons: Homes priced at $5 million or up sold at pre-recession rates.

“While total U.S. home sales fell about 13.7 percent in the first half of this year, activity declined less or even increased in many high-end ZIP codes,” reports San Diego-based DataQuick, which tracks home sales nationally. “Nearly 45 percent of a group of affluent ZIP codes, those with a median sale price of $800,000 or more in the last two years, saw sales rise in the first half of this year compared with last.”

More than a few properties closed well above the $20 million mark in a range of locations. More importantly, what occurred was a steady — sometimes slow, sometimes not so slow, depending on the location — rise in the number of overall sales, particularly above $3 million.

“Looking back, 2011 has really been a better year for us,” says Philip White, president and COO of Sotheby’s International Realty Affiliates. “Our sides are up significantly year over year. Prices are relatively flat compared to last year. Last year (2010) was a notable year in terms of the higher end market, but that was coming off a bad year. Statistically, 2010 was up over 2009 because 2009 was so bad.”

In an Institute for Luxury Home Marketing survey of U.S. agents in the $1 million-plus market, 77 percent reported an increase in luxury activity in 2011 over 2010. Internationally, sales are up as well, according to a recent Christie’s International Real Estate survey. Roughly, 67.5 percent of member brokerages responding reported an increase in buyer activity for the first eight months of 2011.

Sellers coming to grips with the realities of the current market became the tipping point in many places. “You can’t put a strategic price on a property that you are going to move down from. You’ve got to be very sensitive to what brokers are telling you it should be,” advises Robert Borden, chairman of the board and chief residential advisor at LandVest.

Miami showed substantially more growth than any other market in 2011, but by fall, other Florida locations were beginning to show signs of revival. “The Florida population is increasing, unemployment is decreasing and we are seeing more corporate group moves. Real estate unit sales are up, including $1 million plus,” observes Betty Graham, president of Previews International for Coldwell Banker NRT.

RIGHT NOW
Speaking about the 2011 market at the National Association of Realtors annual conference, NAR Chief Economist Lawrence Yun underscored the contradictions in the current market. Although homes are more affordable than at possibly any other time, there has been no appreciable uptick in overall sales. “The Fed wants to stimulate lending, but it’s hard to get loans approved,” he observed. Consumer confidence still registers at low levels, although jobs are picking up. The litany of positives for real estate, according to Yun, include a slowing of price depreciation, a decrease in the inventory of newly foreclosed homes, and, in many areas, the number of for-sale properties is trending down.

In some places, including those hardest hit by the downturn, inventories are approaching lows that haven’t been seen for years. Add to that a growing understanding among consumers, especially high-net-worth individuals, that the time to buy is now. “The smart money is coming back to the market,” says John Turco with Prudential Florida Realty of Naples, Fla. “I have never seen the Naples market take off like it has. Our market started to improve about five months ago. Our inventory is off by at least 60 percent from last year.”

In Paradise Valley and North Scottsdale, Ariz., the number of homes for sale holds steady while per-square-foot prices are trending upward, reports Tom Pelliteri with RE/MAX Excalibur Realty. In Houston, Keller Williams Realty agents see money on the sidelines beginning to venture back into the market and a pent-up demand for homes in the $1 million to $1.5 million range. And in Miami, “The market has definitely been on an upswing. We are closing $250 million this year,” says Jill Eber, with The Jills Team at Coldwell Banker Residential Real Estate.

At year-end, a growing number of reports such as these from luxury enclaves all over the country paint a picture of high-end markets stabilizing and, in some instances, improving. Not only are luxury properties selling in more locations but brokers tell us they have even more sales pending. “Big properties are under negotiations now,” says Eber.

“High-end deals are coming together in a lot of the major urban markets,” observes Paul Boomsma, president of Luxury Portfolio International and COO of Leading Real Estate Companies of the World.

Seattle broker John Brian Losh, who is also the publisher of LuxuryRealEstate.com, acknowledges increased sales, but also notes reduced prices. “Transactions started to happen pretty consistently throughout the year, but prices are much lower. Properties are selling, but at bargain prices.” Moore-Moore agrees. “Luxury buyers relish the art of the deal. They are value conscious and are looking to buy future profitability by buying smart.”

INTERNATIONALLY
The big story for the high-end market in 2011 was foreign buyers. They only account for approximately 5 percent of U.S. sales, but as prices and the rarity of a property increase, so too does interest from buyers outside the U.S. Also important is the appeal of an area. In Florida, 25 percent of all sales from June 2010 to June 2011 were to foreign buyers, particularly Canadians, Brazilians and Venezuelans.

The hottest markets are global destinations such as Beverly Hills and New York that attract international and domestic buyers. Foreign buyers buoyed Miami’s record year. Here, cash transactions, favored by foreign buyers, accounted for 43 percent of single-family and 77 percent of condominium sales in October. Nationally, only about 29 percent of sales are all cash.

“International buyers look to the U.S. as stable politically, a safe haven for money, offering a desirable lifestyle, and on sale! They will continue to invest in U.S. luxury homes,” says Moore-Moore.

This year, other places including San Antonio, Vail, Atlanta and Chicago report growing interest from outside the U.S. Houston, according to Bruce Kink at Keller Williams Metropolitan, has seen an increase in buyers from Latin America, China, Japan and Russia.

There are no indications that this interest will slack off in 2012. “So far we’re seeing great things happen. We’re so busy showing things it’s hard to keep up. We have people coming from out of the country and not just in the summer time now,” Beverly Hills agent Jade Mills said in early December. Mills, with Coldwell Banker Previews International, is ranked as the No. 2 real estate agent in the world. Particularly notable, she says, is the number of buyers from Russia, China and Indonesia looking in Los Angeles’ famed Westside neighborhoods.

And rather than putting a damper on sales, the economic turmoil in Europe is only enhancing the cachet of U.S. properties. “No one really knows what’s exactly going on in Europe and that’s disconcerting, but on the other hand that makes U.S. real estate more attractive,” says Losh.

“A lot of people in the world are still more confident about our economy overall than their own,” says Boomsma. “Most of the world still sees the U.S. as a safe haven for investment, for property rights and ownership.”

LOOKING AHEAD
Still, assessing the market — and even categorizing the recovery — continues to be complicated. Many local markets continue to struggle, which means that in spite of promising indicators, crystal balls this year are apt to be a little fuzzy. “The country and the luxury space are becoming more fragmented so it’s harder and harder to make not only a global statement, but to make a national statement,” comments Boomsma.

“In 2011, the luxury market continued its recovery overall, although each market continued to deal with its unique situation,” says Kathy Neu, president of Luxury Homes by Keller Williams. “Based on what we hear from industry experts and our associates, this trend will continue in 2012 as buyers take advantage of the opportunities in the recovering market.”

Looking ahead, Graham sees more positives for Florida, including, “expectations that the widening of the Panama Canal will increase commerce.”

John Tuccillo, former NAR chief economist and current chief economist for the Florida Association of Realtors, cautions, “The recovery will be long, but it is a recovery. I think that we are past the bottom, but the slope up is not very steep — or won’t be until we can create more jobs.”

Looming for 2012 also are a number of potential bumps along the road to recovery. One is the presidential election, which Losh describes as the proverbial elephant in the room. “Traditionally, election years are good for business. I think activity will remain the same if not pick up. But this is an extraordinarily long recession, so that could change things,” he says.

Other wild cards include potential changes in tax laws, including potential cuts to the mortgage interest tax deduction. The lower end of luxury, under $2 million, has not experienced the same uptick as the higher prices. This is the price bracket that is also most affected by constraints from lenders and from changes to loan limits for conforming loans that took place earlier this year.

Don’t be surprised to see more distressed sales of high-end properties, says Moore-Moore, as more owners lose upscale homes and others choose strategic default as an option. “As of the fall of 2011, 2.3 percent of homes in foreclosure were $1 million property. Expect this level to hold for 2012,” she says. However, these sales might also offer an opportunity for new luxury buyers to move into the market, shares Rob Aigner with Keller Williams Beverly Hills.

Will 2012 end better than it started? “I’m betting we’ll see the number of luxury home sales going strong at the end of 2012,” concludes Moore-Moore. “Prices will still be under pressure as we work through high-end short sales and foreclosures. Will 2012 be a good time to buy upper-tier homes? Absolutely. Qualified prospects will find plentiful inventory and good value.”

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