Five Forces Behind the Luxury Real Estate Boom

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As 2013 comes to a close, The Financial Times reflects on five reasons the luxury real estate market has seen a promising upswing over the last 12 months. Compared to the U.S. as a whole, the luxury market has experienced a superior recovery from the housing market bust with home prices in the top 5% increasing by as much as 10% since September of 2012 while the other 95% increased 6% over the same time frame. Read on to find out what has fueled this healthy boost in the luxury market.

• The increase in wealth. While everyone the world over is rejoicing in the recovering U.S. economic conditions, high-net-worth individuals are doing a decidedly more vigorous celebration dance. Recent data has revealed that the top 1% of households by income has captured 95% of the income gains between 2009-2012. Larger stock portfolios held by these high income individuals have benefitted from a booming stock market. The wealthy are searching for homes to fit their lavish lifestyle and are less likely to let interest rate increases dissuade their buying choices. In addition to these staggering numbers, the remaining 90% of the country has experienced fallen incomes by 16%.
• Affordable (Oversized) mortgages.   It's no secret that cash is king in the luxury real estate market, but when a mortgage is needed, they are accessible at historically low rates. Larger loans (usually $625,000 in high-cost areas) were generally more expensive and had stricter requirements than conforming loans, but recently have become more in line with conforming loans in terms of affordability and screening requirements. Another factor is the tax break, interest on loans can be written off up to $1M.
• Foreign buyers. The media has been reporting a sharp increase in purchases by foreign buyers. From Europeans to Asians, buyers are coming in from outside the U.S. with a sense of urgency to buy. Metropolitan cities like Miami, L.A. and Honolulu have seen the largest upswing in purchases by foreign buyers.
• New construction is back. For several years after the market downturn, new construction of luxury properties was virtually nonexistent. But contractors are getting back in the game as inventory continues to stay low despite an ever increasing demand. The country's largest builder of luxury homes, Toll Brothers, have increased signed contracts by 23% in dollars and 6% in units in the fiscal fourth quarter. Co-founder of Toll Brothers Robert I. Tolls discusses the current state of the luxury home building market and it's relationship to the overall luxury real estate market, "The supply of luxury homes is still not meeting current demand, let alone the pent-up demand of the last seven years. This supply constraint could lead to a further escalation in luxury home prices above and beyond normal trends until industry production returns to historic equilibrium.”
• Existing homeowners are trading up. First-time homebuyers are not the sector fueling the increase in luxury home market increase - existing homeowners are coming up from beneath the water, now having the ability to sell their homes and move to larger, more expensive residences. According to The Financial Times article, more than 85% of homeowners with a mortgage in the second quarter have some equity in their homes, this number up from 75% in 2011. Low inventory is allowing trade-up buyers an easier time selling their current home.

The Housing Market According to Fannie Mae

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The housing market has been making big news lately, and it seems everyone has something to say about home prices, inventory and mortgage rates. To make sense of all the information floating around, editors of the LA Times met with Fannie Mae chief economist Douglas Duncan to get the scoop on what to believe about the current state of the market, and what to ignore. Here's a summary of Duncan's comments:

• There is no bubble, this is not a boom. Duncan does not view the housing market as robust, rather that rising home prices are simply bouncing back from very low bottoms. New construction is also moving at a slow but steady pace, however it is not expected to resume the pace it held at the height of the market.
• Don't fear the mortgage rates. Fannie Mae reports that there is little correlation between the increase in mortgage rates and home prices and Duncan predicts that while sales may decline, home prices will continue to increase. Duncan also doesn't see a second surge in rates in the future, but rather a gradual increase.
• There is no longer shame in renting. Ownership is still part of the dream, but renting has become a larger part of the norm. Investors have purchased single-family homes since the boom and families who were drastically burdened by the recession are renting to "recreate" the home ownership experience. And "downgrading" to renting no longer means that your home owning days are over, Duncan says many who lost their homes will own again.
• It's true, it is a good time to buy. Although home prices are up from their rock bottoms, they are still considerably low as are mortgage rates despite to recent spike. However Duncan warns, "You should only buy a house if you can afford it."
• Investors: a possible risk. Investors have played a crucial role in the market recovery. However it is possible that as new construction begins to take off, investors could sell their holdings, which could cause decline. Duncan urges investors to watch construction which acts as competition.

Riskin Associates has seen a renewed energy in the high-end market in the recent weeks. Many high-end listings in Montecito are receiving back to back showing requests and multiple offers, proving that the competition is stiff across all branches of the market.

Year's End Market Forecast

A Montecito estate listed by Riskin Associates

With two weeks of mid-80's temperatures here in Montecito, the team at Riskin Associates is having a hard time believing summer is almost over. With a busy selling season, fall is sneaking up on us and reminding us that 2013 is coming to a close! Thus far, the market has been booming this year: the low-end seller's laughed all the way to the bank due to bidding wars, inventory was tight and suddenly high-end listings are getting escalating activity! With the exciting movement in the market, agents, buyers and sellers are all looking at the market forecast for the remainder of 2013.  According to Forbes Real Estate writer Morgan Brennan, here's where the market is going:

• Don't worry about bursting your bubble. While prices are soaring at impressive rates, they are not catching up to the pre-burst levels. Prices are still lower than they were back then, in fact there are still many undervalued area's across the country.
• Prices will continue to increase through 2013. Experts project that 2013 will close with home prices anywhere from 6-12% higher than last year's based on supply and demand. However, the progress is expected to slow due to increasing inventory and high mortgage rates.
• Inventory won't stay low for long. Early in 2013, inventory hit a 12-year low, but is already starting to increase. Realtor.com president Errol Samuelson expects that inventory levels will flatten out into fall, but surprisingly, prices will continue to appreciate. New construction will increase as homebuilder's will feel renewed confidence and begin new developments.

2013 has seen some of the strongest market increases since the recovery began. A healthy competitor for the banner year that was 2012, real estate professionals are anxiously watching for 2013's grand finale.

Why Luxury Real Estate is a Vote of Confidence for the U.S. Economy

A luxury montecito estate

The U.S. economy is in full recovery mode! Over the last year, middle class families have jumped at the opportunity to purchase homes with record-low interest rates, contributing the boost in the market. Homes priced under $1 million rose 11% in price during the first half of 2013. Now the luxury home market is gaining momentum as well, with homes priced over $1 million jumping an average of 37% during the same time frame. According to an article released by Financial Post, these are the highest numbers seen since the market's height in 2007. The article goes on to explain that the luxury market tends to follow (closely) behind the broader market, as luxury property purchases tend to be "discretionary spending" and generally waits until a stable market is experienced.

This upswing the in real estate market is a sign of widespread economic growth.  According to the article, economists predict a U.S. economic expansion of 2.3% in this quarter alone. How does home purchasing indicate general economic growth? Home buying spurs consumer spending, with decorating, remodels and entertaining.

Wealthy families are gaining confidence in the economy as they are beginning to see stabilization of their investments, and beginning to purchase high-end homes. For this reason, the surge in the luxury real estate market reflects a vote of confidence in the broader economy. Riskin Associates is excited by a recent article published on AOL Real Estate which named Santa Barbara as the #3 city seeing the highest rate of market rebound in the US!

sales up 33% from last year in santa barbara county

As of lately, fantastic weather has graced our seaside town. Things aren't just looking up outside, however: Our office has been booming with action. We have proudly closed nearly $110 million in sales since January, a new record for us. In fact, the southern Santa Barbara County real estate market is up 33% in sales compared with last year.  

We're thrilled to see the market upturn, as increases in high end real estate sales bodes well for the market in general, boosting consumer confidence.

Additionally, we have some exceptional mega listings coming up and will have some beautiful things to share here. Stay tuned because can't wait to show them off!