During the boom, pundits frequently talked about the "the perfect storm," the unique confluence of factors that sparked the run up in prices. Without the unprecedented combination of historically low interest rates, a flood of property-hungry baby boomers, unprecedented wealth creation, and mortgages that made it possible to buy even a mansion without spending your own nickel, the bubble might have been little more than a hiccup in the historic trend of slow but steady appreciation. This year, 2008, saw another perfect storm as the combination of job losses, high energy costs, a tide of foreclosures that still runs strong, a pending presidential election and the near collapse of the credit markets rocked the economy, pushing the long-awaited recovery in real estate even farther out.
For luxury, the outlook is more uncertain than in any of the last eight years; like real estate in general, it can't be painted with a single brush. Until 2008, upper price brackets were somewhat immune to the overall slowdown. But as the year began, the paralysis affecting real estate overall began to creep into the lower end of the luxury market. "Many entry-level luxury buyers had stretched to buy as much house as possible, often using loans which proved to be inappropriate for their situations. This resulted in lots of inventory and declining values," observes industry veteran Laurie Moore-Moore, CEO and founder of The Institute for Luxury Home Marketing.
Looking ahead, Moore–Moore says, "Financial market health, interest rates, credit availability, relative currency values, stock market conditions, attractiveness of alternative investments and political conditions are all wild-card factors that will impact the luxury residential market in 2009. The good news is that the luxury home market is the last segment to slow and the first to bounce back."
For the real estate market overall, guesstimates for a recovery range from 2010 to 2011. "The market will be struggling for at least another year–probably well into 2010," predicts Jim Gaines, Ph.D., an economist at the Real Estate Center at Texas A&M University. "We'll continue to see some price declines, but I am hoping that we will start seeing some lessening of the rate of decline in the next six months. I think the summer of 2010 will be the best time for real estate and that's assuming that we don't have a severe recession. If we do, put it out another year."
Jonathan Miller, author of the most recent Price Waterhouse/Urban Land Institute annual report on Emerging Trends in Real Estate believes "the worst in the housing market is over." Still, he uses "wobbly" and "lurching slowly" to describe a recovery.
"We probably haven't seen it quite over yet," says Paul Boomsma, president of the Luxury Portfolio Fine Property Collection at Leading Real Estate Companies of the World, referring to price declines. Once the market recovers, Boomsma, like Gaines, expects prices to be close to what they would have been if the boom's perfect storm hadn't sent them into the stratosphere.
Key to recovery for real estate is the availability of consumer credit. "Our business won't recover until consumer credit recovers," says Laurie Keenan, president of Prudential Real Estate. Like Tuccillo and Boomsma, Keenan reminds us that still there will be millions (NAR's estimate is 5.04 million) of homes sold this year. In fact, according to NAR, the number of sales is on the rise, particularly in states such as Florida and California. Keenan believes this is a very noting that although prices in Florida are down substantially, almost 20 percent from August 2007, the median sales price state-wide is still 14.2 percent higher than in 2003.
Even though inflation-adjusted prices for the first half of 2008 compared to 2007 are down, according to the Office of Federal Housing Enterprise Oversight, much of the decline comes from the weakest markets in California, Florida and Nevada. In most other states, according to OFHEO's Chief Economist Patrick Lawler, prices are declining more moderately or even increasing.
This outlook was written and researched in October, during the weeks of the turmoil on Wall Street. Almost everyone interviewed prefaced his/her comments with the caveat "before last week" or "before the bailout" in reference to the Dow's precipitous slide. While this article reflects their best assessments, those opinions could easily change as events unfold.
Certainly at the onset, the turbulence in the financial markets put everything on pause. In San Francisco, one of the stronger markets in the country, Avram Goldman, president and CEO of Pacific Union GMAC Real Estate, says it was evident that many buyers were taking a breather. Still, he emphasizes, "The market has not come to a halt."
Although it's too early to gauge the effect on buyers, many in the industry echo Michael Good, CEO of Sotheby's International Realty Affiliates, who says the financial crises will be more alarming to people in the upper tier than anyone else. "Consumer confidence gets shaken and the rich are not immune," says John Brian Losh, publisher of LuxuryRealEstate.com and owner of Seattle brokerage Ewing & Clark.
Dee Shultz, director of luxury homes by Keller Williams in Austin, Texas, is seeing a new reluctance even from buyers in the $3 million-plus category, which she attributes to uncertainty resulting from turmoil over both the election and the stock market.
One area that will be affected is the second-home market for everyone except those in the very high end. "People are simply going to defer their desires for a second home because the economy and their investments are going to let them do that. It won't last long because there is an overwhelming demographic demand for those kinds of houses. That market is going to come back and it's going to come roaring back," Tuccillo says.
The shift into a watch-and-wait mode for many affluent consumers began in early summer. Julie Gelfond, an associate with Coldwell Banker Devonshire Realty in Denver describes the summer market as cautious. "These are savvy buyers who knew the economy would get worse," she says. By fall, they were ready to buy. "Many believe it might not go down farther. Others just don't want to wait any longer. They have liquid assets and they have cash," she says.
Other Coldwell Banker associates are having a similar experience, particularly for properties priced above $4 million, reports Jim Gillespie, president and CEO of Coldwell Banker Real Estate. "The stock market collapse seems to be bringing some money into this area of the market. They recognize the long-term value of real estate and believe a home to be a strong investment. As real estate hopefully continues to show improvement, the luxury consumer will gain even more confidence in our sector."
One of the biggest changes is that luxury buyers are more realistic and looking for value. "There is serious negotiating going on and they are willing to wait a little longer" to find the right deal, says Mike Reagan, senior vice president of Brand Marketing at RE/MAX International. "They don't have the same drive to get the deal done" as fast as they did before.
Looking ahead, Gillespie says waterfront, urban living and well established luxury areas will do well. "In unsettling economic times, I think it is a natural reaction to search for a home where values have remained steady and, where there has been some correction, the strong potential to rebound. The explosion of downtown luxury living should also continue. And, even for the affluent, there does exist a desire for empty nesters to take advantage of downtown amenities, culture, sports, et cetera.
Also bolstering luxury sales will be international buyers who were an important part of the 2008 market. There are still definitely a significant number of international buyers in the U.S. market, but they are more selective, and, like domestic buyers, looking for value.
Luxury consumers are seasoned buyers. Many weathered the last recession in the early 1990s and the savings and loan crisis. They know the storm won't last forever. Yet still, like everyone else, they are waiting for the rebound.
