Seeking Real Estate Bargains? Try Looking at the High End

Mainstream Home Prices May Be Rising, But Luxury Properties Still Offer Deep Discounts

The Wall Street Journal 

25 September 2009

Falling real estate prices are becoming as much a feature of high-end neighborhoods as ocean views, infinity pools and four-car garages.

While the latest data suggests prices for mainstream homes may be stabilizing after several years of pain, the news for luxury homes isn’t looking as good.

That’s bad news for sellers, naturally, but anyone in the market for a home listed for $2 million or more will find deeply discounted asking prices—and may be able to command even lower prices.

On Tuesday, data from the Federal Housing Finance Agency showed that average home prices ticked up 0.3% nationwide between June and July, including a 1.6% bounce on the west coast. The gains are modest, and they are partly influenced by the season—higher-end homes tend to sell better in late spring and early summer, as families try to move before the school year. Analysts are disappointed the rise was not higher.

Nonetheless, prices have now risen three months in a row. And compared with the disastrous events of the past few years, anything other than Armageddon is apt to raise spirits.

But these numbers only relate to homes purchased with conforming loans backed by the FHFA—in most areas, that describes mortgages of up to $417,000, or up to $713,000 in the country’s most expensive regions.

That overlooks luxury and high-end homes, where the outlook remains bleak.

“I would say we’re 40% off 2007 prices for everything,” says broker Chad Rogers, who covers the area from Malibu to Hollywood Hills for Hilton & Hyland, a Beverly Hills real-estate firm. “We’re now seeing prices consistent with where we were back in 2003.”

“The $10 million to $30 million properties are on the market for a very long time,” says Cathy Wood, a real estate broker covering Beverly Hills and surrounding areas for realty firm Gibson International. “They’re seeing a lot of price reductions.”

Realtors, she says, “are now selling $500,000 condos, when they used to sell $5 million homes.”

Across the country in hedge-fund haven Greenwich, Conn., local broker Eric Bjork at Prudential Real Estate finds a similar effect. “There’s a new level of value being set,” he says. “The $8 million [homes] are selling for $6 million, and the $10 millions are selling for $8 million. When you do the math, it looks like an adjustment of 20% to 30%.”

You’ll find similar anecdotal data in several high-end markets. But real estate Web site, which tracks listing prices on multiple listing services across the country, took a look at what’s happening to listing prices for homes over the $2 million mark.

Such homes only account for about 2% of the properties listed on the site, but represent 25% of the total price reductions by value. Overall, sellers listing homes for more than $2 million have dropped their asking prices by a total of $7 billion, with an average price reduction of 14%. The average for all properties tracked by Trulia is only 10%.

Data for individual Zip codes is intriguing, whether you’re in the market or you just like to rubberneck. According to Trulia data, 28% of the homes currently for sale in Beverly Hills (Zip code 90210) have dropped their price, with an average discount of 11%. In Aspen, Colo., (81611), 39% of the homes have cut their price, by an average of 16%.

On New York’s Upper East Side (10065), no less than 40% of the homes have slashed prices—and by an average of 18%. In California, some of the most exclusive areas in Newport Beach, Big Sur and Monterey have seen a third of the sellers reduct prices, by an average of about 15%. Malibu? More than half have cut prices.

Chip Case, economics professor at Wellesley College and one half of the Case-Shiller index duo, says that some of these markets may be finally catching up to the wider housing market crash. “That level was more in the hold-out category,” Mr. Case says. “Up until recently the foreclosures weren’t hitting that level .But they are now. There’s no question about that. You’re seeing some contagion from the prime level to the luxury end.”

Bottom line: At the high end, it’s a good time to be shopping for that dream home.

During—and after—a bubble, investors often hope that “quality assets” will hold value. It’s usually a vain hope. Just ask people who owned luxury condos in Tokyo after 1990, or investors in Cisco Systems (CSCO) after the tech-stock bubble popped. Real estate is not that different.

Sooner or later, even rich homeowners need to sell. They get divorced. Their company collapses. They relocate or retire. And, when they get tired of waiting, they cut their price. Factoring in taxes, upkeep and the opportunity cost of keeping money in a non-performing asset, an empty luxury home may be costing owners a lot just by sitting there. That gives them a powerful incentive to make a deal.