Luxury Home Pricing Dynamics

posted on November 21st, 2009 filed under: Real Estate News

As noted previously, luxury real estate in Miami and Coral Gables has been stuck in a supply-sales imbalance.  Too many houses on the market relative to sales usually means falling prices.

List prices were sticky even as sales dried up, as sellers and their agents believed the luxury market would be immune to the subprime mortgage crisis.  But there are several reasons to expect luxury homes to follow the economic truth that is a supply-price curve:

  • Even if distressed sales are less likely in the luxury home market as in the lower-priced segments of the market, people still feel the need to move on with their lives.  Nobody’s getting any younger.  And while the wealthy have more staying power, they also have more going power — i.e., they can accept a lower offer just to move on.
  • High-priced real estate is not perfectly independent of lower-priced real estate.  Most people in luxury homes started with less and moved up.  Paul McCulley of PIMCO has explained the “Plankton Theory” of his colleague, bond king Bill Gross: The real estate market is like a food chain, and those at the top will starve if those at the bottom die off.  You cannot eliminate a portion of the population of buyers without affecting home values.  “Well-contained” has become an adjective of ill repute.
  • High-end real estate is not independent of credit markets.  Although many luxury-home buyers pay cash, many borrow against income and pay a mortgage.  Not all are “liquid” like Gordon Gekko.  Changes in credit availability and changes in perceived income and job security affect the ability and willingness of some high-end buyers to commit.  Again, you cannot eliminate a portion of the population of buyers without affecting home values.
  • These are extraordinary times born of extraordinary excess.  The Federal Reserve, the U.S. Treasury and Congress have taken actions that are consistent only with a belief that the nation faces the threat of a debt-destroying deflationary depression.  It’s enough to give even a rich man the willies.  The least one can do is avoid overpaying for a depreciating asset with borrowed money.

Although luxury home prices in Miami and Coral Gables did not fall like the rest of the market over the past couple of years, that has to some extent been a function of the stalemate in sales.  As sales activity thaws, prices should reveal themselves to be significantly lower.

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posted by // This entry was posted on Saturday, November 21st, 2009 at 8:02 pm and is filed under Real Estate News. You can follow any responses to this entry through the RSS 2.0 feed.

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