Excerpt from Bloomberg News, by Kathleen M. Howley:
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.
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.
The $1-million-and-up end of the market usually trails 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, says one expert. Those homeowners usually can hang onto properties during tough times, and their houses are big enough for them to stay even if their families expand.
The rebounding housing market is helping to spur a broader recovery. Economists are 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.
“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 LLC 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 (INDU) 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.
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.
Rebounding equity markets have helped to fuel the surge in sales of high-end homes, LePage said. The Dow Jones benchmark has jumped 18 percent this year through yesterday. North American millionaires have about 37 percent of their assets in stocks, according to a June report by Cap Gemini SA (CAP) and Royal Bank of Canada.
“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.”
For buyers of real estate selling for more than $1 million, rising interest rates may be less relevant than for other buyers. 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 then 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.