January 28, 2009, 1:04 pm
Why Luxury Housing Could Be Hit Hardest
The realtors and housing analysts who argued that the top of the housing market would be immune to the housing market’s travails have now mostly given up. Most agree high-end homes have followed the rest of the market into the tank.
SothebyBut what if the high end actually does worse than the rest of the market?
I haven’t heard anyone of repute raise this theory, but consider the following:
JUMBO DEFAULTS. An article today by my colleague Nik Timiraos shows that delinquency rates for jumbo mortgages–those that are too high to qualify for backing by the government–are more than three times as high as regular conforming loans. About 6.9% of prime jumbo loans were at least 90 days delinquent in December, compared to 2.1% for other mortgages. That suggests mortgages taken out by the affluent and wealthy, or at least the aspiring or former wealthy, are deteriorating at a faster rate.
FEWER BUYERS. When everyone was getting richer, selling a high-end home was a plus, since there was a rising number of buyers. Now, with Richistan evacuating faster than Malibu in a mudslide, the number of potential buyers for big, $1 million-plus homes is on the decline. At least on the middle and lower end of the housing market, there is a crowd of first-time buyers and discount-seekers ready to take up the slack. At the top, well, it is getting much more lonely among buyers.
WORST REGIONS. The regions with the highest-valued properties–New York, California, Nevada–have reported the biggest fall in prices. That means homes that once were priced at the top of the national market may take the biggest spill, and have the hardest time recovering.
THE INDEBTED RICH. Everyone assumed that the wealthy were living more within their means than the rest of the population. But they may have been just as leveraged as everyone else–and certainly owe more in dollar terms. From 1995 to 2004, the top 1% of Americans by wealth more than doubled their mortgage and residential debt to $494 billion. Since the recession reached the rich later than the rest of the country, that mountain of debt could become a huge overhang on the high-end housing market.
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Lower the rates for Jumbo Holders as much as conforming loans… I have a FICO above 800, income to support the loan, and a significant amount of equity, but interest rates are at least 2% higher than conforming loans..
Comment by Jumbo Loan Holder - January 28, 2009 at 8:33 pm
The 80/20 rule applies to all sectors of society. Poor, middle class, uber-rich.
Look at the NFL. This is supposed to be the best of the best that were picked out of all the kids in all the colleges across the nation.
And in the NFL about 20% of the players really stick out. And 5% of the 20% shine like diamonds in the sun.
The same could be said for the NFL of wealth.
80% of these people are getting loans, using credit and barely staying “wealthy” by the skin of their teeth.
20% are comfortable now because they make wise decisions.
5% will never worry. Even if you took all their assets, they’d rebuild a fortune because they wealthy were it matters most. In their mindset.
Note Taking Nerd #2
http://www.mynotetakingnerd.wordpress.com
Comment by Note Taking Nerd #2 - January 29, 2009 at 1:03 pm
Hard for me to believe, but we could actually “afford” to buy up — by quite a bit.
But every time we look at one of the $1million + homes, the amount of taxes makes me blanch, and I stop looking.
Taxes are something that I have taken a much more serious look at — particularly now that we are living in Obamaville where socialist seem to abound.
Comment by Taxes are one of the issues - January 29, 2009 at 7:14 pm
I live/rent in Fairfield County, Conn and yes, the blood bath in the higher end real estate market, $1M to $5M has started in earnest with no end in sight. It will be worse than in the more moderate price range. Its not just the purchase prices that are out of reach of potential buyers, you also have to consider the carrying costs of these McMansions–i.e. heating, insurance and real estate taxes and that puts off even buyers who can afford them, who ask why should I be paying $30,000 a year in property taxes for a house?
Comment by Megalos - January 30, 2009 at 12:34 am
As always - Irrational on the way up = Irrational on the way down
Cannot outrun supply/demand fundamentals…maybe delay for the short run.
But eventually they catch up with you.
Let the ultra wealthy hold the houses - they are ‘immune’ to the economic crisis.
And honestly, the prices do not reflect current market conditions and repricing of risk.
So - let them hold until 2012+ when the market flattens.
Good Luck to All
Comment by Save Money... - January 30, 2009 at 9:00 am
Frank- indebted rich? that’s a contradiction in terms.
you question whether the wealthy live within their mean?
“everyone assumed that the wealthy were living more within their means than the rest of the population.”
i tell you they would not be weathly if they did not do so! many of those people purchasing multimillion dollar estates are not rich they just pose as being rich. Stanley’s “Big Hat, No Cattle” syndrome.
Comment by littleitaly - January 31, 2009 at 7:51 pm
Donald Trump and others of his ilk could, in fact, be insolvent. I think Manhattan condo values will decline 50 -60% over the next three years.
Comment by Richard Cranium - February 2, 2009 at 11:49 am
Keep hearing that tired refrain. Bet they said that in Greenwich too. Note taking nerd nailed it exactly.
Anyone who is truly wealthy will ride this out without drastic lifestyle adjustment or nasty price cutting.
For the come lately nouveau faux rich Wall St class that was overpaid and hence overleveraged (on overpriced properties) just like their now defunct firms and who now stare listlessly at their bonus envelopes which are either, shrunken to a fraction, empty or mostly stuffed with IOU’s collateralized by toxic CDO’s that even the USG won’t buy, that loud clucking noise is the din of the chickens coming home to roost.
There is a lag to this wave of the credit tsunami and while Joe six-pack and company got washed away in the first rush, time for the rest of the imprudent to snap out of their trance and price their homes correctly, or get swamped in the next surge.
Things are different this time, there will be a reckoning at the top of the market, not just the middle or bottom.
Regional nuances are nice to talk about but let’s be real here - Every region in the country is now feeling this recession on steroids, few more acutely than the NE Wall Street crowd.
Boo-hoo!
