Real estate has returned as a favorite topic of conversation at the pair of Starbucks Corp. coffee shops in Granite Bay, a Sacramento, California, suburb where the median income is double the rest of the state.
“When the real estate market was booming, people sat in Starbucks and talked about how much they paid for a house,” said Craig Moe, who in June bought a $1.2 million property discounted 25 percent from its sale six years ago. “Now, they talk about how little they paid and what a bargain they got.”
Home sales from Los Angeles to Charleston, South Carolina that are priced at more than $1 million are gaining at triple the pace of the broader market, according to real estate research firm DataQuick Inc. Wealthy purchasers, helped by gains in equities, are diving into real estate a year after a recovery began in the housing market when less well-heeled buyers rushed to take advantage of record-low interest rates, said Susan Wachter, a professor of real estate and finance at the University of Pennsylvania’s Wharton School in Pennsylvania.
“The real estate recovery has been built on purchases by middle-class families, even though they haven’t been the ones to flourish during the recovery,” she said. “Now, the economy is getting a vote of confidence from wealthy homebuyers.”
Sales of homes priced at more than $1 million jumped an average 37 percent in 2013’s first half from a year earlier to the highest level since 2007, according to DataQuick. Transactions priced at less than $1 million rose 11 percent in the same period to the highest since 2009, data from the National Association of Realtors show.
Discretionary Spending
The $1-million-and-up end of the market usually lags behind the cycles of the broader market because real estate purchases by wealthier buyers “tend to be discretionary spending” that can wait until economic conditions are right, Wachter said. Those homeowners can usually hang onto properties during tough times, and their houses are big enough for them to stay even if their families expand.
“These usually are people who can weather any storm,” Wachter said.
The rebounding housing market meanwhile is helping the economic recovery with economists predicting the U.S. economy will expand by 2.3 percent this quarter from 1.7 percent in the prior three months and grow every period through at least 2014’s third quarter, according to the median estimate in a Bloomberg survey.
Consumer Spending
Home purchases fuel consumer spending that accounts for about 70 percent of the economy — and at the high end spending on decorating, furniture and appliances is much greater per home. Properties priced for more than $1 million accounted for about 2.4 percent of all home sales in June, up from 1.3 percent in early 2012 when the rest of the market began recovering, according to the National Association of Realtors.
“Wealthy families are gaining confidence in the economy and they’re seeing stability in their investments,” said Nikki Michelini, director at wealth management firm Aspiriant in Los Angeles. “A lot of them are saying now is the time to buy a house.”
The upper tier of real estate that’s now rising the fastest also fell the hardest during the financial meltdown. Sales of property priced for more than $1 million tumbled 41 percent in 2008 as the Dow Jones Industrial Average fell to an 11-year low. It was preceded by a 4 percent falloff in 2007. In the wider market the collapse began in 2006 with a 39 percent plunge through 2007, followed by a 3.8 percent drop in 2008, according to the Realtors’ association.
Harder Fall
“The luxury market came down harder than the rest of the market because people didn’t want big mansions anymore,” said Nick Sadek, who brokered the purchase of the Granite Bay home. “They lost a lot in the stock market crash.”
Homes priced at more than $1 million lost about 46 percent of their value during the housing crash, according to a Bloomberg survey of sales in the top four cities, based on valuation data from Zillow.com. Since then, their value has more than doubled. Home prices in the broader market fell to $154,600 in early 2012 and increased to $214,200 in June, according to the Realtor’s group.
The surge in home sales in the plus $1 million category in 2013’s first half was led by the Seattle metropolitan region’s 61 percent jump, according to DataQuick. The Sacramento area that includes Granite Bay was next, at 60 percent. Seattle had a first-quarter median home price of $312,600, according to the Realtors’ group. In Sacramento, the median was $209,300.
Charlotte Gains
San Diego and Charlotte, North Carolina tied for third place, at 52 percent. The median home price in Charlotte was $155,400 in the first quarter, and in San Diego it was $412,300. The metropolitan area around the nation’s capital gained 44 percent, in Boston the increase was 25 percent, in Stamford, Connecticut, it was 14 percent, and in Philadelphia it was 12 percent.
Nationally, the median price for a single-family home was $176,600 in the first quarter, according to the Realtors’ group.
The DataQuick analysis didn’t include New York, where sales exceeding $1 million are more common, because complete data wasn’t available for June, said Andrew LePage, senior analyst for San Diego-based DataQuick. The median price for a home in Manhattan was $865,000 in the second quarter, according to Miller Samuel Inc.
Rebounding equity markets have helped to fuel the surge in sales of high-end homes, LePage said. The Dow Jones index has surged TK19 percent this year for the period’s biggest gain since the technology-stock boom in 2000. North American millionaires have about 37 percent of their assets in stocks, according to a June report by Cap Gemini SA and Royal Bank of Canada.
Better Prospects
“The rich are feeling better about their prospects and starting to rediscover real estate as a place to park money,” LePage said. “The stock market has created a tremendous amount of wealth, and that’s being put into homes.”
Bruce Bernard last month bought a $2.6 million five-bedroom home in Rancho Santa Fe, California, about 30 miles north of San Diego, after stock market gains “put a little extra change” in his pocket, he said in an Aug. 2 interview as the Dow hit an all-time high.
“We were in a better position with our investments, so it felt like we had a little extra cash we could use for a move without feeling pinched,” said Bernard, 64, a retired executive from Shell Oil Co.
For people buying homes closer in value to the national median price, the U.S. the housing recovery hasn’t been as straightforward. With prices rising at the fastest pace in seven years and the average mortgage rate about a percentage point higher than the 3.35 percent seen in early May, affordability has dropped for four consecutive months, according to an index from the Realtors’ association.
Bubble, Bust
President Barack Obama said yesterday in a speech in Phoenix that the U.S. has “got to turn the page on this kind of bubble-and-bust mentality that helped to create this mess in the first place,” as he proposed measures to boost homeownership.
For buyers of real estate selling for more than $1 million, rising interest rates may be less relevant. About eight out of 10 purchases of luxury real estate are made in cash because it makes bids more competitive, said Aspiriant’s Michelini, the director of wealth management. Most buyers then take out mortgages on their new properties, she said.
“It makes sense for them to get mortgages because rates are so low they’re getting more leverage out of their assets by investing the proceeds of the loan,” she said.
The loans are mostly larger than the maximum amount that can be backed by the government. Conforming loans are capped at $417,000 for most of the nation and $625,500 for high cost areas. Buyers of high-end homes often use jumbo, or private- label, mortgages that typically have higher standards, Michelini said.
Adjustable Mortgages
Wealthy buyers prefer adjustable-rate mortgages, or ARMs, that have initial fixed periods of five or seven years, Michelini said. ARM rates typically are at least a percentage point cheaper than fixed rates, and there is no reason to fear a payment spike when the loan adjusts, she said.
“If they get to the end of the fixed period and their rate goes higher, they can always pay off the loan,” Michelini said.
At the Starbucks in California’s Granite Bay, when conversations turn to real estate Moe has his own story to tell about snagging a $1.2 million bargain on his 5,000-square-foot mansion with a five bedrooms and a five-car garage. In 2007, as the economy was heading toward disaster, the newly constructed home went for $1.6 million.
“I always admired this house but quite honestly couldn’t afford it,” said Moe, president of Car West Auto Body, a string of collision-repair shops. “I decided to grab it while the price was low because I see the market starting to head up.”
