‘Wealth Effect’ Kicks in: Luxury Homes Are Hot, Rest of Housing Market Gets Hosed

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Home sales have been declining since last fall and in some cases steeply, with memories of bidding wars early last year triggering wistful sighs. The sales decline continued into the summer, and indications are that they’re dragging into September as well. But the median sale price continued to rise, if at a slower rate, and in many areas has moved out of reach for the median-income household.

Unsold inventories are rising. This has hit new homes the hardest. Otherwise exuberant homebuilders – they’re licking their chops about the sky-high asking prices – are complaining about foot traffic just as inventories have reached 6 months’ supply [Drowning in Unsold New Homes?].

Home sellers have gotten nervous, and 24% of them across the country lowered their listing prices in July to entice potential buyers to show up. And home flippers are finding their business model – buy low and sell high – under pressure [Home-Flipping Collapses in San Francisco, Losses Spread ].

But hey – no worries at the upper end. In the luxury housing market, it has always been a long drawn-out process to sell a home. There aren’t that many people around with the means to buy these properties, and sellers usually aren’t that desperate and don’t have to sell and thus can hang on to their homes for years. In that rarefied air, the housing market is booming, and the time it takes for a luxury home to sell is dropping.

The median age of inventory of homes above $1 million has dropped for all price categories from July 2012 to July 2014, The Wall Street Journal reported. In the $1 million to $1.9 million range, the median age of inventory dropped from 132 days to 98 days over the two-year period. Further up, in the $7 million to $7.9 million range, it dropped from 179 days to 142 days. In the $25 million to $29.9 million range, it dropped from 222 days to 180 days. They’re practically selling like hotcakes. At the very top, at $30 million and above, the median age of inventory is now down to just 139 days.

The change has been dramatic in Vail, Colo., where it was common for homes above $15 million to linger on the market for more than two years. Now they’re “trading in months, not years, and sometimes in weeks,” said Tye Stockton, an agent with Ascent Sotheby’s International Realty, pointing to a home listed at $19.9 million that went into contract in under 45 days. Like many, Mr. Stockton attributed the change to the uptick in the stock market as well as the improving economy. Not only are these houses moving fast; many are commanding near-record prices a square foot, he added.

These folks no longer dilly-dally around:

In Greenwich, Conn., Tamar Lurie with Coldwell Banker is expecting about 20 sales above $10 million this year, which is roughly twice the number sold last year. In July, she was one of two agents who sold the Armonk, N.Y., home of Ron Howard for $27.5 million. Ms. Lurie said they had an accepted offer in the first week, and the house sold at asking price in less than three months.

The luxury market is sizzling across the country, even as the rest of the housing market is teetering. The foundation of the housing market, first-time buyers, is crumbling. The primary force behind the soaring prices since late 2011 have been private equity firms and other big investors. They plowed the endless and nearly free money from Wall Street into key housing markets, ratcheting up prices with every wave. Now their business model has tripped over the impact of soaring prices on renting those homes to the strung-out American middle class. And they’re backing off.

But the luxury market has been fired up by the stock market (and other asset bubbles), as real estate agents pointed out. The Fed should be proud. In the luxury market, monetary policy truly morphed into the “wealth effect” that then has performed miracles.

In 2010, Fed Chairman Ben Bernanke explained the wealth effect in an editorial. “Strong and creative measures” is what he called QE and ZIRP. They would drive up stock prices, he said. “And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.” Out of Greenspan’s dog-eared textbook.

And this is precisely what has happened, after nearly six years of ZIRP and $3.5 trillion of QE. But it didn’t happen in the broader economy. It was concentrated on a tiny sliver at the very top. The wealthier the people, the more they benefited. A working stiff with $40,000 in his retirement fund might have made $60,000 after fees since the market bottom – if he didn’t sell at the bottom. A billionaire might have made a couple of billion dollars.

But most Americans don’t own stocks and didn’t benefit at all. Savers were eviscerated. People living off well-planned, prudent fixed-income strategies suddenly found their future go up into the wealth effect destined for others – who’re now splurging on luxury homes.

But at the rest of the market, where homes have once again moved out of reach for many Americans, something has to give. And it’s not going to be the maxed-out middle class. Read…. But Who the Heck Is Going to Buy all these ‘Overpriced’ Homes?

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  4 comments for “‘Wealth Effect’ Kicks in: Luxury Homes Are Hot, Rest of Housing Market Gets Hosed

  1. Louis
    Sep 11, 2014 at 8:13 am

    This article notes that luxury properties are selling at a faster rate. Are there suddenly more people who can afford these homes, or is most of this “bigger-fool” theory speculation?

    • Sep 11, 2014 at 9:20 am

      Good question.

      The “wealth effect,” as defined by Bernanke, has actually more to do with “confidence” and thus the willingness to spend, rather than the ability to spend. So if you feel richer, you are more likely to open your wallet. And this appears to be the case at the top of the wealth spectrum.

      That said, based on market gains over the last few years and how unequally they have been distributed, there are some more people who can, or feel they can, afford these homes, and I’m sure that also plays a role.

      And of course, the “bigger-fool” theory always applies. Just because people are wealthy and smart, doesn’t mean they can’t be the “bigger fool” that speculators are hoping to find.

  2. Neil
    Sep 11, 2014 at 10:27 am

    The wealth effect that is occurring in the upper echelons of society due to ZIRP/QE is quite apparent. This time, the bubble is concentrated in the sectors where the wealthy and powerful live, move, and have their being. In other words, If Yellen and her colleagues at the Fed allow this bubble to burst, their friends, cohorts, and personal aquaintances will be the ones to feel the full brunt of the unwind. The lower classes will suffer as well, no doubt. But the most extreme collapse will be experienced by those who own expensive homes and huge stock portfolios. Hence the reason why I believe Yellen and her colleagues will be hesitant to tighten and quick to ease in the future. Their desire to protect their own skin greatly outweighs their desire to protect the dollar.

    If you would have told anyone after the stock market crashed in ’08-’09 that the Fed would still be doing QE and ZIRP after the S&P 500 fully recovered and, even after it went on to hit 2000, they wouldn’t not have believed you. Yet that is where we are today. 2015 is going to be a fun an interesting year for the markets. Buckle up.

  3. Ilka Vanina
    Sep 11, 2014 at 4:29 pm

    Some can buy luxury homes and others who worked diligently to pursue to American Dream have to resort to tactics as described in Thomas Freeman’s ebook The art of debt guerrilla warfare. Seems like spending years in college, being educated and working a real job cannot compete with incomes from playing ball, acting, singing (if you still can call it that) and rigging the stock market.

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