Why a real estate insider thinks era of “aspirational pricing” is over.
Luxury real estate got battered in 2016 in some of the toniest markets – in Manhattan, in the Hamptons, in Aspen, in Miami, etc., but then some sales closed this year, and traffic ticked up in some places, and the meme cropped up that the soaring stock market or whatever was pulling luxury real estate out of its funk.
Last month, Bloomberg explained the phenomenon this way:
Manhattan’s luxury apartment market is seeing sparks of life after sputtering for much of last year as a construction surge created an abundance of choices for the well-heeled. The first two weeks of January marked the strongest start to a year since 2014 for sales at $4 million or higher, with 50 contracts in that range signed, according to a report from Olshan Realty Inc. The increase in deals, coinciding with a stock-market euphoria and developers’ greater price flexibility, follows a year in which luxury contracts fell by 18% from 2015….
But it may just be that sellers, after watching their properties languish on the market, swallowed the bitter medicine and slashed the price they’re willing to take in order to make a deal.
“Nearly every time we read about a high priced sale, there is usually a big discount associated with it,” explained Jonathan Miller, CEO of real estate appraisal firm Miller Samuel, in his newsletter. It doesn’t mean the luxury end of the housing market is suddenly recovering, but “that the property was significantly overpriced, to begin with, and after a lengthy marketing time, the seller came down and joined current market conditions.”
Aspen ran into trouble in 2016. According to the Elliman Report, luxury sales in Q4 dropped 11% year-over-year to 25 houses. And the median price plunged 29% to $4.8 million.
So it was a huge relief in 2017 when the sale of a 14,000-square-foot, eight-bedroom, 11-bathroom house closed at a price that was slightly above the most expensive sale in 2016, according to Mansion Global. A turnaround of the market?
The house, which had languished on the market since August 2015, sold for $24.4 million: 32% below original asking price!
And Aspen’s most expensive sale of 2016? It closed in November at $24 million, 26% below the original asking price!
In the Hamptons, a playground for the well-heeled, a similar scenario played out. Judi Desiderio, CEO of real estate broker Town & Country, told Reuters: “The high end sank like a stone in 2016.”
In her annual list of the top ten sales in the Hamptons, the most expensive home sold for $70 million – less than half the record of $147 million during boom-year 2014. The lowest-price home on her top-ten list changed hands at $15.99 million, the lowest since 2010, she said.
But traffic to the eight offices of her brokerage was up in January, and indications suggest a better 2017, she told Reuters.
Total home sales in the Hamptons in Q4 dropped 15% year-over-year. The median price fell 7% and the average price 30%, according to the Elliman Report. At the luxury end, the median price plunged 30%, and the average price 43%!
Same thing, but not as advanced in Miami-Dade. In Miami Beach, the number of luxury sales – defined as the top 10% on the price scale – in Q4 dropped 23% year-over-year, according to the Elliman report. In Miami itself, luxury condo sales plunged 26% and the median price 32%, which is now filtering into the luxury single-family market.
But hope came early this year it seemed: on February 15, Forbes reported that a developer was able to unload a 13,500 square foot, six-bedroom oceanfront home for $22.5 million, “the highest price paid for a single family home in the city in two years.” But that wondrous sale happened at a price that was 34% below the original asking price.
The most expensive home in San Francisco that sold in 2016 – a 1902 mansion which had been converted to an 11-unit apartment building and reconverted into a 9,095 square foot mansion – went for $21.8 million, and here too: 28% below original asking price!
As Jonathan Miller would put it: sellers “came down and joined current market conditions.” He has a special word for these lofty asking prices: “aspirational prices” – when sellers get hung up on prices that are “detached from what buyers were willing to pay”:
The conventional wisdom in many luxury markets is that demand has waned. I think the more accurate take on the market is that the era of “aspirational” pricing is over.
Referring to an event he’d attended the day before, Miller added:
One of the speakers said they are seeing a lot more high-end sales occurring, so the high end is coming back. I agree that we indeed are seeing more high-end sales, but only after their asking prices have been cut sharply to current conditions.
The blame falls more on the seller who probably didn’t listen to their broker’s advice in 2015 and saw lots of other sellers listing at similar levels. In the current market, the demand remains significant but only after asking prices are close to reality.
I’m all anecdotal here but could it be said that super luxury list prices, in general, could be overpriced by a third? It’s not unreasonable when a listing sits on the market for 1-2 years without any offers. It suggests the degree of impact the aspiration pricing can be holding back sales activity.
But that’s how it is: When a market turns, sellers, stuck in the halcyon days of the past, refuse to lower their prices. But potential buyers lose interest at these prices, and transactions stall. Once sellers adjust prices to “current conditions,” buyers start nibbling again. Volume ticks up, at lower prices – until that batch of buyers is gone. Then the next batch of buyers, seeing what prices have done, expects more declines, and the dance continues.
For investors in multifamily rentals in the most expensive markets in the world – San Francisco and New York City – there is a new reality. Read… Here are the Top “Sell Markets” in an Overpriced World as “the Apartment Cycle Draws Closer and Closer to the End”
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There’s a very definite trend I’ve been observing.
London’s prime markets (chiefly Chelsea and Mayfair) have lost between 20 and 30% in 2016 and are still coming down. While obviously all is being blamed on Brexit, the trend had started earlier in 2016, when it was assumed the referendum would be a mere formality for a “Remain” landslide.
But at the same time prices for “other” housing in London has increased dramatically: last week average price stood at a hard to swallow £484,000, echoing warnings by the Nationwide Building Society that “continous low interest rates” in the UK could lead to “pricing unbalances”.
At the same time I read here sellers of prime property in San Francisco have started dropping their pretenses but my acquaintances in California tell me the market for “ordinary” housing is reaching out of control proportions, with “crap shacks” (apparently a local term for houses requiring a lot of work in less than prime markets) having seen a yearly increase in 2016 of over 10%!
It’s the same everywhere: the big players are slowly reaching for the exit in orderly fashion while the small players are still warming up for fever pitch.
Obviously it’s impossible to make premonitions: it may merely be that housing is out of fashion so the old investments are being disposed of like outmoded clothes. Or it may be the big players have sniffed those nosebleed values are catching the attention of local governments with huge (and almost exclusively self-inflicted) holes in their budgets. Or it may be the Martians are coming. Who knows?
How will this lower transaction pricing affect property tax assessment and tax payments collected? A ten million dollar home in the Hamptons surely has one hell of a property tax to pony up.
Will be fixed soon. Global demand growing again: https://www.wsj.com/articles/chinas-exports-rebound-sharply-as-global-demand-grows-1486707312
With muppets leading the way, Trump will not have to do anything to make luxury home prices great again.
Does someone still trust Chinese government figures?
No wonder the so called mainstream media have become the little boy who cried wolf (not street).
Most of those luxury buyers derive their incomes from people who no longer have any money. Could it be that poverty is starting to trickle up?
Maybe they don’t have me to kick around anymore My taxes on my small cape cod on a third acre were almost 10 grand and a loaf of bread at the only grocery store in Sag Harbor was 7 dollars so I sold out wisely I believe They don’t want working class stiffs like me living amongst them anyway and honestly the feeling is mutual The last straw was my homeowners premium doubled because I was near the water Never had a penny claim in 40 years those thankless bastards
Your comment is why I love wolfstreet. ;)
Oh…come to Key West. You ain’t seen nuth’in yet.
If insanity was a commodity, this place would be independently wealthy. As it is now, you ain’t wealth, they don’t want YOU.
Your comment was a gem! (just had to say)
“Could it be that poverty is starting to trickle up?”
THAT is the most perfect way i’ve heard the death of the middle class put to date.
Too late as they own the means physical or electronic and also derive wealth from rents and investments. They actually dont need too many other people to continue to gain. Nothing new at all…just business. This should be obvious by now.
What’s really driving the housing market? Ok, we’re at or above the median home price compared to 2006. Is this soley a result of hedge funds buying homes or have the loan standards dropped to allow in distressed buyers?
Since NINJA type loans drove the first bubble, it seems dubious that suddenly in the midst of the great recession everyone became solvent and started buying up homes.
It can’t all be the Chinese.
And I’ve read that in inflation adjusted terms we are still about 20% below the peak median price. Seems as long as the stock fueled hedge funds have money, home prices will continue up.
Both.
Recall, Obama first told HUD to remove the clause that forbid any institution involved in any fraudulent activity ( including no contest and pay a fine) from making or underwriting any loans…that also all applied to the VA…which chains on down the line.
Next, late last year, he adds insult to injury by reducing the down payment and insurance fee and upping the tax payers responsibility for default.
I won’t even mention his Ex Order underwriting ANY of Blackrock’s losses with your money just before he left in January.
Funny how main street media overlooked these stories, I suppose they just weren’t important.
Current asking prices of resale housing are 300% higher than long term trend. Bottom is a very long way down.
Oh gawd, here we go again. We the turkeys in Taleb’s assertions are headed to the butchers:
’Taleb states that a black swan event depends on the observer. For example, what may be a black swan surprise for a turkey is not a black swan surprise to its butcher; hence the objective should be to “avoid being the turkey” by identifying areas of vulnerability in order to “turn the Black Swans white”.’
(http://encyclopedia.thefreedictionary.com/Black+swan+theory):
Last Fall we were at a park in Penglai, China, on the Bohai Sea. My granddaughter was feeding the swans. They were all black, no white swans. What does it mean when all the swans are black swans
Maybe I’m overthinking this. :)
Demographics. I’ll throw in a ‘Harry Dent’ theory that this market, and many more, just have a shrinking number of buyers. Ultra-high end luxury homes are less of a priority to an aging population. There are still hot real estate markets and sectors that exist, when they have a demographics trend in their favor.
I wouldn’t want to be living in any of those places if old ways return.
I’m reminded of when John Baum in The Big Short visited Florida with the agent and met the pole dancer with 5 condos. London will take as big a hit IMHO, at least 35% overvalued, has risen by 65% since 2010.
If anyone is looking for a bargain, the Pierre Penthouse, which was offered at 125 million in 2013, then reduced to 95 million, then 63 million, has now been renovated to modernize it and is just 57 million asking. The most recent purchase, unrenovated, basically raw space, was in the early ’90s for the low 20s.
44,000 a month for maintenance, plus real estate taxes, and it may still be cash-only purchases at the Pierre.
There is a “magic” ratio of household income to house price.
It is 2.2 in America.
Some areas, like SF, NYC, Aspen, etc have a different number, but they have one. I like this article.
http://www.mybudget360.com/the-magical-2-housing-ratio-between-median-nationwide-home-prices-and-household-income/
Everything reverts to the mean. It’s as sure as gravity. Buy when the price drops just below the mean. Now is near the top.