Real estate’s high end is finally getting whacked in 2012

I believe the low end of the housing market is finding a bottom. Due to the timely processing of subprime foreclosures, prices crashed hard at the low end, and shadow inventory is much less abundant. Low interest rates and lower prices pushed affordability to record highs, and investor interest has helped absorb the visible MLS inventory. As a result, properties priced below the median in most markets is probably not going to go down much from here.

The high end is another story.

Banks have not foreclosed on it’s high-end customers preferring to allow them to squat in luxury. Lenders know the losses here will be huge if they force the air out of the bubble they created, so they have buried their heads in the sand hoping the market would recover and make them whole. As a result, properties priced above the median rarely sell, and when they do, they generally get discounted slightly from recent comparable sales. There is no investor interest at these price points, and with the difficulty in obtaining jumbo financing to support inflated prices, demand is almost non-existent. If not for the prosperous 1%, this entire market would be dead.

The current circumstances at the top of the market are untenable. When sales start to pick up, expect prices to drop until they become better aligned with income and affordability like the lower rungs of the housing ladder already have.

For Luxury Real-Estate, the ‘Year of Capitulation’

By Robert Frank | CNBC – Thu, Aug 2, 2012 2:57 PM EDT

Even the rich aren’t immune to the pressures of the housing market.

Prices for homes priced at $1 million or more have fallen a 20 percent this year, according to RealtyTrac. The average sale price for top-tier real estate has fallen to just over $2 million, from $2.5 million in 2011.

Those prices cuts stand in stark contrast to the broader housing market, which is seeing early signs of price stability and even price increases for the first time in years.

Differences in foreclosure processing and loan availability explain much of the difference in performance between these two markets. The low end was crushed quickly and is now recovering whereas the high end avoided the crash which merely delayed the inevitable.

All that price-chopping at the top, however, has sparked a wave of sales as buyers scoop up deals and sellers accept the new reality of lower prices.

The number of transactions for homes priced at $1 million or more has jumped 18 percent this year, one of the strongest increases since 2008, according to Realtytrac.

This increase in sales is accompanied by a decrease in prices. That is a classic sign of capitulation.

Brokers for luxury real estate are already calling 2012 the “The Year of Capitulation” for wealthy sellers.

I think sellers are now resigned to today’s prices and what’s actually selling,” said Paul Boomsma of the Luxury Portfolio, a marketing group for luxury homes. ” People who are serious about selling are ready to make a deal now, where maybe they weren’t a year ago.

There are several factors behind the price drops. The high end of the market didn’t fall as much or as early as the broader market, since there weren’t as many distressed sellers that were forced to sell. Those wealthier sellers have hung on to their properties, waiting for prices to approach 2008 levels.

The key phrase there is “that were forced to sell.” Squatting is epidemic at higher price points.

Now that they see that the prices of 2008 aren’t likely to return anytime soon, many are deciding to drop their prices just to get a deal. The increase in sales has itself spurred sales, as wealthy sellers see a larger number homes in their neighborhoods trading at lower prices.

“There is now a critical mass of data so sellers can say, ‘Well, this is the new reality,'” Boomsma said.

Denial and fear have given way to acceptance and capitulation.

Of course, bargains are all relative in the mega-mansion market. And homes priced at $1 million or more represent a tiny slice of the overall market, with high concentrations in New York and California.

Yet some mega-mansions have seen price cuts of 30 percent or more in recent months.

Of course, if the prices was in the WTF category to begin with, price reductions to reality are meaningless.

A private beachfront-compound in Carpinteria Calif., has sliced $7.2 million from its price tag and is now being offered for $14.9 million, according to Luxury Portfolio. The property includes a six-bedroom main house, guest villa, tennis court, swimming pool, spa and 95 feet of beach frontage.

A historic estate in the horse country of Bedford, N.Y. has been reduced by $3.5 million. The estate was built for the Harriman family in the early 1900s and features an equestrian center and 100 acres of gardens, ponds and rolling hills. The new sale price: $26.5 million.

South Florida has seen a huge boost in luxury home sales driven by buyers from Latin America. But prices are falling there as well. An oceanfront palace in Delray Beach, with 15,000 square feet of living space, has been reduced by $4.4 million and is now available for $19.5 million.

These sellers are capitulating,” said Daren Blumquist, vice president of RealtyTrac. “They are pricing to get these properties sold.

Blumquist said many sellers may also be motivated to do a deal this year in anticipation of possible tax changes in 2012. If the Bush tax cuts expire, capital gains rates could rise from 15 percent to more than 20 percent. That added tax bill can grow to the millions of dollars when selling a mega-mansion.

“Election years bring uncertainty, so they might want to close a deal now,” he said.

I have been predicting the demise of the high end for quite some time. I have recently updated my monthly reports to reflect the historical relationship between median home prices and rental parity during the last stable period from 1993 to 1999. As you may have surmised, some of the premium neighborhoods in Orange County have always been inflated. Now we know just how much.

Relative to their normal level of price inflation, some of our high-end neighborhoods actually look affordable. Or course, some of that is due to low interest rates making the ridiculous look reasonable, but one could argue that some of our premium neighborhoods are a relative bargain today. Will they still crash? Not if lenders can help it.