The Safest Way to Play Real Estate ~ What the 1% is Buying Right Now
By Paul Benson – Tuesday, June 10th, 2014
The outlook for the safest real estate investment is clearer now that we have put the recession behind us. Though the recession affected all sectors of the real estate market, certain areas are experiencing rebound and growth.
We have learned that cash remains king as banks slowly loosen their lending policies and individuals who were adversely affected by real estate investments begin to recover from their losses.
The truth is, we now actually have a shortage of homes for the luxury cash buyers known as the top 1%, and there is a clear difference between the home markets for these buyers and “the rest of the world” when it comes to growth in home values.
Though general home prices are higher than they were last year, they are slowing in gains. The numbers are based on a three-month running average for closing sales prices that ended in March, released by the much-watched S&P/Case-Shiller monthly report.
As per Case-Shiller, though prices in the top 20 markets are up 12.4% in March year-over-year, the annual gains are beginning to flatten. This trend is apparent even in very hot markets that are losing steam. Take San Francisco, for example. Prices there are up 21% year-over-year, but this is tapering off.
So why the flattening?
In the general real estate market, we are witnessing investors moving out and mortgage-dependent buyers moving in, and there is insufficient wage growth at this point to support these types of price gains. Prices are higher because of a lack of supply — not because the average American can afford these price gains.
Sale of Priciest 1% Homes Up While Other 99% Down
While sales of homes in the non-luxury market have either flattened or dropped, the top 1% of the housing market is still booming.
Affluent buyers are feeling bullish about housing as luxury homes sales continue to grow. The stock market is very strong, and high net worth buyers continue to look at luxury real estate market investments as a means to diversify their portfolios while also enjoying a certain lifestyle.
According to the latest report by the National Association of Realtors, sales of homes that cost $1 million or more increased by 7.8% in March in comparison to the previous year, while homes that cost $250,000 or less (representing two-thirds of the housing market) dropped 12% in March year-over-year.
A report by DataQuick shows that the sale of homes over $2 million or more soared 33% in January and February compared to last year.
The trend for the top 1% of U.S. homes is also positive, with sales up 21% this year according to Seattle-based real estate brokerage Redfin.
Soaring markets include Oakland and San Jose, where sales are up 96.2% and 91.2%, respectively.
Resort cities such as Miami, Fort Lauderdale, and San Diego have seen increases in sales ranging from 25.7% to 56%.
Add to this the recent news of the $147 million sale of an East Hampton property in May — now the priciest home sale ever in the U.S. — and the Greenwich, Connecticut home on 50 acres that sold for $120 million a few weeks earlier, and you’ll see why the über-luxury home market is sizzling!
Cash is Still King: Vacation Home Sales Climb
According to the National Association of Realtors, sales of vacation homes made up 13% of the total homes sold in 2013 — the largest share in seven years. The Hamptons, the summer playground for celebrities and the Who’s Who of Wall Street, saw a 52% increase in Q1 2014 home sales, with median sales prices up 18.9%.
Federal Reserve data indicates that U.S. homeowners have benefited from a $3.8 trillion value increase as a result of home price gains since the beginning of the real estate record in 2012. Many Americans are using the equity they have built in their homes to pay cash for properties, bypassing the lending process that has become exceedingly more cumbersome in the wake of the 2007 housing collapse.
According to Bloomberg, 29% of non-investment homebuyers paid in cash in the first quarter of 2014, while a Redfin study of 17 of the largest U.S. cities puts the cash purchases among all home sales so far in 2014 at 32% and the percentage of cash purchases in the 1% tier at 44.7% — with resort cities such as West Palm Beach, Miami, Fort Lauderdale, Las Vegas, and San Diego topping the chart with percentage cash purchases ranging form 70.5% to 45.2%, respectively.
The majority of all cash buyers in the general market are baby boomers who are beginning to retire. Baby boomers who have accumulated equity in their homes over the past few decades are in many cases downsizing to smaller homes in resort cities.
They don’t want the hassle of a mortgage, and with the improving economy and stock market growth, they are driving the market.
Cash buyers for the 1% homes are high net worth individuals purchasing based on lifestyle preferences such as skiing, golf, and farm and ranch. Lifestyle has become the number one criteria in their decision-making process.
As a result, they look to invest in areas that are close to airports, mountains, beaches, and cities that provide recreational activities such as golfing, skiing, biking, mountain climbing, and other outdoor activities important to a health-conscious generation. Markets such as Park City, Utah have seen the benefit of this change and will continue to see strong growth.
I continue to be optimistic about the growth of the luxury real estate market in general and resort areas in particular. Low mortgage rates, rising consumer confidence, and the growing number of cash and international buyers will continue to feed the growth in 2014.
Couple that with the growth in equity markets that has greatly benefited high net worth individuals, and we will continue to see the über wealthy purchasing recreational properties in resort areas across the U.S.
Until next time,
Paul Benson for Wealth Daily