What money doesn’t buy: Luxury home market stalls
July 7, 2009
In the affluent village of Bronxville, N.Y., where residents of million-dollar homes have an easy half-hour commute into Manhattan, selling a house has become a whole lot harder.
Larry Brocchini put his four-bedroom Colonial on the market in late May, with a price tag of $969,000. He and his wife, who want to move closer to their son’s private school, have hosted open houses and showed the home by private appointment about 10 times, but they have yet to receive a bid.
The pool of potential buyers looking to escape crowds and crowded schools of Manhattan is also having trouble selling their apartments and co-ops. In the Big Apple, the median sales price for an apartment priced in the top 10 percent of the market fell as much as 26 percent in the second quarter and the number of sales were cut in half from the year-ago period, data last week showed.
“People are just being a little more deliberative than they have been in the past,” said Brocchini, a 44-year-old attorney.
In fact, high-priced homes are languishing on the market. Nationally, at the current sales pace, there’s about a 40-month supply of homes on the market for $750,000 or more, according to the National Association of Realtors. That’s more than double the stock in mid-2007, before the credit crunch. By contrast, there is now less than a 10-month supply for all homes.
Sales of existing homes priced above $750,000 made up 2.3 percent of all sales in the first three months of this year, the Realtors’ group said. That’s down from 4.4 percent of homes sold in 2007, before high-priced mortgages dried up.
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“The high end is the worst performing sector of the residential real estate market, unquestionably,” said Bernard Baumohl, Chief Global Economist of the Princeton, N.J.-based Economic Outlook Group.
The recession and collateral damage in the stock markets, have knocked many luxury buyers out of the market. Falling home prices coupled with new appraisal rules have scuttled many deals. And, lenders have jacked up interest rates and down payment levels for high-priced mortgages.
Since the credit crunch began in the fall of 2007, few investors have been willing to buy mortgage-backed securities because of soaring default rates. The government’s Fannie Mae and Freddie Mac are virtually the only buyers left, but they cannot purchase mortgages above $729,500. That means any lender who makes a mortgage above that amount – known as a jumbo loan – will have to keep the loan on its books.
To compensate for that risk, lenders charge higher interest rates. The average rate for 30-year fixed rate jumbo loan was 6.91 percent last week, according to a survey by Bankrate.com, compared with 5.7 percent on a conventional 30-year fixed rate home loan. That higher rate, for example, means a borrower with a 30-year $750,000 loan would pay almost $600 more a month than at the lower rate.
Rates can be even higher for second homes, which are considered investment properties and therefore riskier for lenders. Second-home buyers play a large role in the luxury market, from Martha’s Vineyard to the ski areas of Colorado.
“The second home market is pretty dead,” Baumohl said. “Banks are being very careful who they provide loans to.”
In Steamboat Springs, Colo., Randall Hannaway, a broker, estimates that about half of his business is in second homes. He’s seen the luxury market get hit by higher inventories and lower selling prices.
“There’s some really unbelievable buys,” said Hannaway, founding partner of Colorado Group Realty. “Not all wealthy people are still wealthy. They may have to sell just to stay afloat, so to speak.”
At the same time, banks are requiring downpayments of 20 percent to 30 percent, even if the borrower has a golden credit history.
“Its far more difficult to obtain a loan today for a borrower than it was two years ago,” said Rick Roper, a vice president with Golden Empire Mortgage in Bakersfield, Calif.
Industrywide, jumbo loans made up about 5 percent of the market in the first quarter of this year, compared with almost 15 percent in the first quarter of 2007, according to Inside Mortgage Finance.
To make up for falling home values, Erik Lebsack is throwing in his 2007 Mercedes Benz, worth about $80,000, with the sale of his four-bedroom home in Lithia, Fla. Appraised at $1.1 million in 2006, the home has been on the market since December for $779,777.
Lebsack said he never thought his house’s value would plummet $300,000 in three years, and still is surprised by the reluctance of buyers to meet his price.
“People either need to get the deal of the century or they feel they’re getting ripped off if they don’t steal the house.” Lebsack said.