Luxury Real Estate Declines Due to Rising Inventory
The 2008 real estate crashed redefined the real estate market. Lending standards were tightened and subprime borrowers–people with low credit scores—were suddenly thrown out of the real estate market. As a result, many people in the real estate industry began to focus on the luxury market. While it is hard to exactly define the luxury market, as real estate is priced so differently across the country, it is generally defined as property priced at $1 million or above.
Demand for luxury real estate has been high in recent years, and properties often sold above the list price. Over the last year, however, the luxury real estate market has changed. No longer are sellers earning top dollar for luxury properties, and many have been forced to drastically reduce the price in order the sell the property. Experts say this could be a sign of a cooling real estate market across the country.
“When average homes are lingering on the market longer, often the luxury market has already turned,” Thomas Veraguth, head of global real estate strategy for UBS Wealth Management. “This is because the luxury market is less liquid and then tends to be more volatile.”
The luxury real estate market has seen a huge rise in inventory as the market has begun to soften. In 2018, a wave of 465,000 new listings came on the scene throughout the nation’s 45 largest metros. That was an 8% increase, and it marked the largest annual inventory growth since 2013. While not all were luxury properties, many were considered to be in the luxury category.
The rising inventories are occurring all across the country, but especially in the large coastal markets. Places like San Francisco, New York, Miami, and Seattle have seen rising inventories and a softening luxury real estate market. That has forced sellers to readjust expectations when trying to move a luxury property.
For example, Miami has a 45-month supply on the market for high-end real estate properties. Manhattan’s housing market changed drastically in 2018, especially at the high end, as rising inventory kept homes on the market longer. According to Jonathan J. Miller, of appraisal firm Miller Samuel, there were 12% more housing units for sale in Manhattan in late 2018 than in 2017, and the time to sell a property increased. It took an average of 152 days for a property to get an offer and go under contract, an increase from 101 days in 2017, according to Garrett Derderian, the director of data and reporting for Stribling & Associates. During that same period, 84 percent of ultraluxury listings — the top 10 percent of units in Manhattan — sold below the original asking price. That was up from 65 percent in 2015, according to StreetEasy.
“Nothing’s selling,” said Cary Tamarkin, founder and chairman of Tamarkin Co. “No one has a crystal ball, so there’s always a cycle at the end of the development. Sometimes you’re pleasantly surprised, sometimes you’re not.”
In the San Francisco Bay Area, the stock of homes priced between $1 million and $2 million increased 37% at the end of 2018. The inventory for homes priced below $1 million increase 31%.
Overbuild in Some Markets
At a time when the market is softening, the luxury real estate, especially the condo market, is dealing with a huge supply of new construction. Hundreds of condos have been built in New York City, Miami, and other luxury markets. In Los Angeles, a huge number of high-end spec homes have hit the luxury real estate market, and real estate agents are having a difficult time selling those properties.
“Like any commodity, when the market is saturated with them, their value declines,” Jason Haber, an agent at Warburg Realty in Manhattan. “If under every rock you found a diamond, diamonds would decline in value. That’s what is happening right now.”
Miami area is a perfect example. It has seen an explosion of high-end condo units being built since the real estate crash. In early March, there were nearly 255 luxury condo units listed for sale at a minimum price of at least $1 million in the barrier island area of Bal Harbour-Surfside-Bay Harbor Islands in South Florida. Based on historical sales, that is a 35-month supply. The oversupply has forced sellers to drastically reduce the price, and Christopher Zoller, a realtor with EWM Realty International in South Florida, says some sellers are being forced to sell units at below the prices that they paid.
“If you don’t have to sell now, don’t sell now,” he warned.
The Decline of Foreign Buyers
Another factor impacting the luxury real estate market is the decline in foreign buyers. Buyers from China, South America, and Russia have played a huge role in the rise of the luxury market in the large metro areas. For example, in Miami, 80% of home purchases are attributed to overseas investors, but many foreign buyers have pulled back from the United States real estate market. China, for example, recently increased regulations on money moving out of the country, and oil-producing countries have been hurt by the drop in commodity price over the last few years.
“Today, we have at the top an emerging market fragility and more regulation on capital export, especially in China, that further limit the purchasing power of a different class of foreigners,” said Thomas Veraguth, head of global real estate strategy for UBS Wealth Management.
A report in July of last year by the National Association of Realtors found that foreign investment in U.S. real estate has declined. There were fewer buyers from China, Canada, the U.K., and Mexico than in 2017.
“The Chinese are calling their money home, and Russia again has been struggling economically, which certainly influences the luxury market,” Richard Green, director of the USC Lusk Center for Real Estate.