Low-End of Luxury-Home Sector Shows Some Signs of Chill

As the national housing market continues to weaken, prices of houses in the $1 million range are slumping in many parts of the country. Still, analysts say the category is holding up better than the overall market.
By: June Fletcher: The Wall Street Journal Online
In once-golden Sunbelt cities like Miami and Santa Barbara, Calif., as well as in major Midwestern cities like St. Louis and Chicago, prices fell in the fourth quarter of 2006 from a year earlier, in some places by as much as 7.2%. In other areas, prices rose slightly but appreciation was sluggish, with gains of 4.3% or less. Still, analysts say, the category is holding up better than the overall market, which declined 10% during the same period.

These are some of the results of an exclusive report done for The Wall Street Journal by the National Association of Home Builders. "The million-dollar market is slowing down," says NAHB's director of research, Gopal Ahluwalia, who conducted the analysis using information from First American Real Estate Solutions, a Santa Ana, Calif., data provider.

Entry-Level Luxe

See a chart of what's happened to the median prices of starter luxury homes in 32 metro areas.

The report looked at sales of new and existing single-family homes costing between $750,000 and $1.25 million in the nation's top metro areas. In 2005's fourth quarter, 65 metro markets had 100 or more sales in that price range. A year later, that figure had dropped by more than half, to 32. And appreciation was generally lackluster. Nearly half of those 32 markets saw prices in this "starter luxury" market flatten or decline during the fourth quarter over the same period a year earlier, in some areas by as much as 7.2%. Overall, the median price of these 32 markets rose a modest 1.4%, to $890,000.

Nationally, median home prices during the same period fell 10%, to $225,000 from $250,000 the study showed. The National Association of Realtors, which tracks existing-home prices only and will release its fourth-quarter report Feb. 15, is projecting that overall median prices will drop just 3.9%, to $216,500, in the fourth quarter of 2006. (NAHB says its figures differ from those of NAR because they use different geographical boundaries for their metropolitan areas and include data from both new and existing homes.)

Analysts say that the million-dollar market is doing better than the overall market because it wasn't quite as overrun with investors during the boom. "There were more buyers trying to move up rather than make a killing," Mr. Ahluwalia says. Because investors make their money by reselling properties quickly, they're more likely to cut their losses -- and their prices -- as soon as they detect a market slowdown.

The Thrill Is Gone

To be sure, a million dollars today doesn't go as far as it did even a few years ago, before residential real estate in many cities experienced double-digit price increases during the boom. Michael Patterson, a Sotheby's real-estate broker in Santa Barbara, Calif., says that as recently as 2001, $1 million would get you an oceanfront estate. Now it will get you a remodeled two-bedroom house built more than a half-century ago. In Dallas, meanwhile, it will buy a brand-new, four-bedroom lakefront home.

It used to seem like a lot of money, Mr. Patterson says, the entry point to luxury. "It doesn't have the mystique that it used to," he says.

Nor are today's million-dollar-home customers the same as those of five or six years ago. Then, they tended to be cash-rich buyers who were mostly immune to mortgage-interest-rate fluctuations. But during the run-up, as more ordinary homes were pushed into the million-dollar range, those wealthy buyers moved up too, to the "super-luxury" level of $3 million and above. They were replaced by middle-income buyers, some of whom were hoping to cash in on the boom and who stretched to trade up using creative financing like option adjustable rate mortgages -- which allow borrowers to decide how much they're going to pay each month -- and interest-only loans. Now, many are "stuck" with homes whose prices are flat or declining, according to University of Maryland business professor Peter Morici.

The Sunbelt cities that attracted droves of buyers and builders during the boom have fared poorly. Overheated and overbuilt markets finally slowed down by the end of 2006: prices fell 4.2%, to $876,250, in Miami and flattened in Phoenix at $887,660 and in Charleston, S.C., at $937,500. Some Midwestern markets also performed badly. Prices were down 3.3% in Chicago, due in part to the loss of manufacturing jobs there. Things were even worse in St. Louis, which lost 3,300 jobs in the year ending November, second nationally only to Detroit. Prices in St. Louis were down 7.2%, the largest decline in the survey.

Starter luxury homes are doing best in coastal cities where strong local economies support the incomes needed to buy them. The study's highest price increase, 4.3%, was in the Santa Ana-Anaheim-Irvine area of California, which has seen a steady rise in employment over the past year, particularly in the professional- and financial-services sectors, and the highest wage increases in three years. On the East Coast, fat year-end bonuses at many Wall Street firms fed a buying spree in the suburbs of New York, where prices increased almost as much, to 4.2%.

Overall, the survey showed a return to a buyer's market in the million-dollar range. But in some places, like San Francisco, where prices have remained high for years -- the overall median is $740,000, compared with the median price of $870,000 in the city's "million-dollar" category -- buyers aren't rushing in. Fatigued by years of fruitless house-hunting, they "can't quite believe" that the market has finally turned in their favor, according to broker Linda Harrison.

Vienna, Va., housing economist Tom Lawler says buyer hesitation is also being fueled by the change in mentality from a speculative market to one based more on need. During the boom, many buyers bought the biggest house that they could because they saw that as a way to increase their investment in real estate without buying rental property. But now that the market is softening, that strategy no longer makes much sense. Lawyer Beth Joffe and her husband, a physician, recently sold their three-bedroom Chicago home for $760,000 and have moved to a much smaller two-bedroom condo in Madison, Wis., that they bought for $300,000. Though both are far from retirement age, neither wants the hassle or added expense of a bigger place. "We don't need that any more," Ms. Joffe says.

Reverse Psychology

Agents say that in many cities, the shifting psychology is causing sellers to reverse their tactics. During the run-up, sellers usually priced their homes slightly above the market knowing that someone would buy them, even if the price tag later had to be lowered somewhat. Now sellers are trying to undercut the market to sell while their listings are still fresh.

That's especially true in relatively new "semi-custom" subdivisions, where many homes, though chock-full of amenities like built-in wine racks and tumbled-stoned backsplashes, tend to look alike. In St. Louis, Steve Shadrach has just listed his five-bedroom, brick-and-stone-front home with a swimming pool, which he bought more than two years ago for $770,000, for $949,000. If he finds a buyer at that price, he'll make a substantial profit. But his asking price is nearly $50,000 less than a nearby neighbor is asking for a nearly identical property, and about $100,000 less than what his builder is charging to build the same house. "I'd like to price it higher, but I have to compete with them," says Mr. Shadrach, a plastics salesman who wants to move closer to his grandchildren.

Indeed, a surfeit of new homes in central New Jersey is partly responsible for the significant price declines in Edison, where prices of starter luxury houses fell 6.7% in the fourth quarter from the year earlier. Coldwell Banker has a $949,900 listing of a "new" five-bedroom brick house that was actually built in 2005, but interested buyers are few. "People are going for less house," says Joe Thomas, an agent with Coldwell Banker. "They're not stretching any more."

Stretched Out

In many parts of Southern California, prices are still on the upswing, although analysts such as Celia Chen, director of housing economics at Moody's Investor Service's Economy.com, says the area is at "high risk" for a fall. Although the local economy is strong, incomes haven't kept pace with the sizzling double-digit price increases these markets experienced from 2001 to 2005. And with federal regulators pressuring lenders to cut back on creative financing, fewer buyers are able to stretch their incomes to buy million-dollar homes.

That's what banker David Jaffe discovered when he put his five-bedroom stucco home in Ventura, Calif., on the market 2½ months ago for $979,900. Ventura's prices are still rising -- they increased 4% from 2005 to 2006, the study showed -- and Mr. Jaffe attracted an offer close to his asking price soon after he listed it. But the deal fell apart in escrow when the buyer couldn't qualify for the loan.

Mr. Jaffe bought the place in April 2005 for $935,000 in a bidding war, and still hopes to find someone who will meet his asking price. But he doesn't expect to see lines forming at his door, especially since homes in his price range are affordable to fewer people and no longer have quite the cachet that they once did. "The market is changing," he says. "It's definitely a buyer's market now."


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Entry-Level Luxe
In the fourth quarter of 2006, only 32 metro markets had 100 or more sales in the "starter luxury" category -- new and existing single-family homes costing between $750,000 and $1.25 million-down from 65 markets in 2005. Here's what's happened to the median prices of starter luxury homes in all of those 32 metro areas:

METRO AREA* 4Q 2006 4Q 2005 PERCENT CHANGE DIRECTION
St. Louis $858,500 $925,000 -7.2%
Edison, N.J. $875,000 $937,500 -6.7%
Miami-Miami Beach-Kendall, Fla. $876,250 $915,000 -4.2%
Chicago-Napierville-Joliet, Ill. $870,000 $900,000 -3.3%
San Francisco-San Mateo-Redwood City, Calif. $870,000 $888,000 -2.0%
Santa Barbara-Santa Maria, Calif. $910,000 $925,000 -1.6%
San Jose-Sunnyvale-Santa Clara, Calif. $849,500 $860,000 -1.2%
Riverside-San Bernardino-Ontario, Calif. $850,000 $858,000 -0.9%
Charleston-North Charleston, S.C. $937,500 $942,500 -0.5%
Nassau-Suffolk, N.Y. $885,000 $886,000 -0.1%
Philadelphia $900,000 $899,900 0.0%
Seattle-Bellevue-Everett, Wash. $880,000 $880,000 0.0%
Oakland-Fremont-Hayward, Calif. $870,000 $870,000 0.0%
Washington-Arlington-Alexandria, D.C.-Va.-Md.-W.V. $861,000 $860,000 +0.1%
Los Angeles-Long Beach-Glendale, Calif. $877,000 $875,500 +0.2%
Phoenix-Mesa-Scottsdale, Ariz. $887,660 $882,020 +0.6%
Atlanta-Sandy Springs-Marietta, Ga. $872,500 $862,600 +1.1%
Newark-Union, N.J.-Pa. $885,000 $875,000 +1.1%
Baltimore-Towson, Md. $889,330 $877,000 +1.4%
Sacramento-Arden Arcade-Roseville, Calif. $878,000 $865,000 +1.5%
Cincinnati-Middletown, Ohio-Ky-Ind. $925,000 $910,000 +1/6%
Dallas-Plano-Irving, Texas $889,200 $875,140 +1.6%
Houston-Sugar Land-Baytown, Texas $916,870 $897,750 +2.1%
Bridgeport-Stamford-Norwalk, Conn. $930,000 $907,500 +2.5%
Richmond, Va. $990,000 $960,000 +3.1%
Bethesda-Gaithersburg-Frederick, Md. $895,970 $869,000 +3.1%
San Diego-Carlsbad-San Marcos, Calif. $900,000 $870,000 +3.4%
Salt Lake City, Utah $929,670 $896,420 +3.7%
Minneapolis-St.Paul-Bloomington, Minn.-Wisc. $935,000 $899,000 +4.0%
Oxnard-Thousand Oaks-Ventura, Calif. $900,250 $865,250 +4.0%
New York-White Plains-Wayne, N.Y.-N.J. $906,750 $870,000 +4.2%
Santa Ana-Anaheim-Irvine, Calif. $917,750 $880,000 +4.3%

Areas with 100 or more "starter luxury" sales.

SOURCE: National Association of Home Builders