Luxury Home Pricing

Pricing Luxury Homes 

Luxury Homes Defy Gravity

Overview

Do luxury homes prices actually fall in economic downturns (bust cycle)? Do they snapped back upwards during economic upturns (boom cycles such as we are in now)? This is how the normal world works in free and fair markets. The same rules would also apply to almost all real estate EXCEPT luxury homes. Luxury Homes seem exist in a parallel universe encumbered from normal market physics.

Elasticity of Home Prices

When Economists speak of “elasticity of demand/supply” they simply mean how quickly and far prices react to demand and supply. It also assumes a free and fair market (no monopolies, colluding oligopolies and government price controls). For example, in the short term gas (petrol) is very inelastic. You need to get to work no matter the price per gallon (litre).  While in the longer term you buy more fuel efficient car and so reduce your demand.  Other examples would be vacation airline tickets (lots of airline and destination choices) which are fairly elastic. However, concert and super bowl tickets can be inelastic – you have to go no matter the price.

Real estate in considered fairly elastic. When most people move they pick up their home and take it with them elsewhere. Most people do not have the luxury of owning more than one property. If you get transferred, change or lose your job etc., you have to sell – no matter what. If you are fortunate to be selling in a Sellers’ Market , you will get top dollar. If you are unfortunate and selling in a bust cycle you could face selling a price below what you paid for the home. Or if there is a shortage of similar homes on the market and you might sell at a significant profit. This is the effect of elasticity of supply and demand. However, that assumes that you have to sell.

A Parallel Universe Called Luxury Homes 

Luxury homes, on the other hand, are another matter altogether. Examples are people in the East Coast or Midwest that also own a home in Florida. In 2016, the supply of Luxury Homes (over $750,000 on Clearwater Beach) was at a whopping 17 months. To put it into perspective, a neutral market – neither Buyers’ nor Sellers’ markets – is approximately 5 to 6 months inventory. There were nearly 3 times this amount of luxury home inventory on Clearwater Beach. In median neighborhoods (where people have to buy or sell – no matter what) such a high amount of inventory would see the market and prices crashing into a black hole. Yet, just the opposite is happening.  Click on link Clearwater Beach for more information about the Real Estate Market on our beach. 

Prices were stable in 2016 and in 2018, just 2 years later, the inventory is less than 6 months and prices have risen by 12% yearly since 2016. It is not just luxury homes but also condos. Sure there are some overpriced pseudo luxury homes that have to drop their price. However, good quality luxury homes are hard to find on the beach under $1 Million. Why is that? Because wealthy individuals people don’t need to sell their home. This is true even if it is their 2nd home, vacation home or 3rd home. Most are owned outright and a few have a low mortgage balance as a tax write off.

So What to do if you are Looking for a Luxury Home

“Won’t luxury homes really start to decrease in price when the economy eventually slides into a down cycle-recession again?” The answer to this is probably very little if at all at the luxury level ($750k to $3M) while ultra-luxury (above $3M) will continue to soften (but not crash) due to the property taxes. We’ll see some strategic primary residence shuffling with property owners making Clearwater Beach their official residence (so as to avoid paying higher taxes). In addition, there will continue to be an increase in people retiring and moving to the beach. So, while prices may fluctuate, the long term trend is for a gradual upward price model. 

While there are several strategies, I would look at the same strategy as negotiating with a FSBO. Why? Because most FSBO, just like Luxury Home owners, don’t need to sell, so the strategy is the same. The Net of this entire article is to find the home you want and offer a reasonable price. It doesn’t need to be too high, but low ball offers will most likely end with the seller not interested in anything less than their asking price.

*Disclaimer: Any opinions expressed in this newsletter are that of Dave Carr. I am not a Realtor, economist or financial advisor. I strongly recommend that for any specific investment decisions, it is advised that one consults with a licensed financial advisor. This includes buying or selling a home. This Article was inspired by Damon Rhys’ Blog at https://www.hawaiidamon.com/blog/

<\/body>