Hat tip to Aztec for sending along this article from Bloomberg:
By Jody Shenn
June 16 (Bloomberg) — Prices for the most expensive U.S. homes may not reach bottom for another few years, according to JPMorgan Chase & Co. analysts. (click on image for clarity)
The CHART OF THE DAY shows the supply of unsold homes by price in California, data that the mortgage-bond analysts including John Sim and Matthew Jozoff used in a June 12 report to illustrate the weakening market for the most-expensive residential properties. The supply of homes priced $750,000 to $1 million held steady while the supply of more expensive properties increased.
“Tighter lending standards and the lack of cheap financing for these borrowers continue to be key issues,” the New York-based analysts wrote, referring to “jumbo” mortgages. That’s after so-called interest-only and option adjustable-rate loans were a “major driver” of soaring values, they said.
The government’s moves to aid the housing market include the Federal Reserve’s mortgage-bond purchases to drive down interest rates; President Barack Obama’s “Home Affordable” loan modification and refinancing programs; and new tax credits for some first-time buyers. None of the U.S. initiatives “directly focused on helping the sales of these so-called millionaire homes,” the analysts wrote.
“Currently, we have national home prices bottoming in 2011,” they said. “However, prices for more expensive homes may not bottom out until 2012, and ultimately result in peak-to-trough declines in excess of 60 percent (compared to 40 percent nationally).”
“California is probably worse than other states, but higher-priced homes in general are going to be a problem,” Sim said in a telephone interview today. The state’s median sales price for existing single-family homes fell 37 percent in April from a year earlier, to $256,700, according to California’s Association of Realtors. Nationwide, the price fell 15 percent to $169,800, according to the National Association of Realtors.
I think a strongly related factor is a decrease in “move up” buyers. Recently, CR referenced an article on this:
http://www.calculatedriskblog.com/2009/05/dearth-of-move-up-buyers.html
A lot of sellers today are banks, whereas it used to be that a seller would proceed to buy a new home upon selling their old home. These buyers are now “missing” from the market, and although investors have come in to replace some of them I don’t think this will be the case for higher end housing.
‘In a normal real estate market, about 80 percent of buyers are “moving up” or “moving across” – people who sell one home before buying another’
‘In today’s market, about half of buyers are first-timers and a third are investors, leaving just 15 percent of what he calls “organic” buyers.’
Bottom line, banks are crowding the market, and they are creating sell demand but not buy demand! Investors can fill some of that buy demand, but I doubt it for higher end units in today’s market.
sdbri,
Add in that most other potential “move-up” buyers had their legs cut off at the knees due to over-leveraged houses via the housing ATM, and you’ve got a stagnant high-end for the foreseeable future.
Chuck
That’s why I love this site – the comments are just as informative as the articles themselves.
It’s interesting in the $2-$3.5m bracket. One place I know of listed and sold in a couple days. Others languish forever.
This much I know… the lot I bought in June ’08 in Olivenhain, well, I overpaid for that thing!
sdbri & Chuck,
Job loss, or at least the fear of it, can lead some to not want to move UP in the current financial climate. There are also those who lost a lot of money when the market imploded. That could put quite a damper on thoughts of moving UP!
The top end of the market is esstentially in a deep freeze today. Anything short of a 20-25% decline in prices going forward will only keep inventory levels evaluated and prolong the pain while dragging out the downturn in many areas.
Times have changed over the last few years and many seller’s have failed to adjust to the new reality facing the credit and real estate markets.
Jim, I’ve heard a lot of talk that the bottom end always leads during a housing pullback, the top end goes last and recovers first. In other words, a lot of people like to say that what’s happening now is exactly what always happens in a regular cycle, ho hum, nothing to see here. However, I’ve been told by some seasoned pros that it’s the upper end that usually falls first, people trying to move up a rung on the ladder who didn’t get a firm grasp, while the bottom end is usually relatively stable since that’s where people are slipping down to. Indeed, when I bought my first house in 1992, right after a serious pullback, you could get a lot more house for just a little more money, indicating weakness at the upper end. If the long-term pros are right, this big crash in low-end properties last year was very unusual and is now seemingly over, while the pending correction in high-end is more what you’d expect to see in a normal economic cycle as people lose jobs, need to cutback expenses, etc. What do you think?
Don’t forget that the babyboomers will start retiring in the near future. Many of them will want to sell off their larger, more expensive homes for smaller, easier to maintain condos.
Thus more high end homes will be on the market in the next few years.
Another thing (maybe what Chuck is referencing above) is that the bubble was fed from the bottom-up. It was the introduction of masses of unqualified buyers at the starter level — with stated-income, 100% LTV loans and 40%+ DTI ratios — that pushed prices all the way up to the top.
Many people in starter homes originally bought them for $100K and were able to sell just a few years later for $400K or $500K. The vast majority of these people moved far up the chain with these huge down payments, and stretched even more with toxic loans.
IMHO, the reason we’ve seen so little distress in the higher-end market is because of this down payment buffer. These move up buyers were able to tap this equity for the past few years, enabling them to stave off foreclosure while the 100%+ LTV borrowers in the starter neighborhoods had no buffer at all and were foreclosed on almost immediately during the beginning stages of the bubble burst.
Since starter home prices have come down significantly, there is no more bubble-money (from starters and low-mid) for the down payments on the higher-end homes.
Besides what CA renter said, another factor for seeing litle destress in the higher-end market has been the systematically different loan terms in the different market segments. From the various “loan reset” charts that have gone around in the past few years, it’s clear that the subprimes were on a more accelerated schedule than the more expensive loans.
Also, various people have pointed out that banks are not effectively foreclosing on upper end properties. It seems irrational to me, but maybe if you could see the balance sheets you’d find that some of these banks have the choice of either folding today or deliberately ignoring the problem and folding at some undefined time in the future. Given how willing congress seems to intervene, maybe covering your ears and loudly singing “LAH-LAH-LAH-I-CANT-HEAR-YOU” really is the rational move at the moment.
Definitely, the fact that ALT-A as a group were issued and will reset at a later time frame than sub-prime is another factor. Time will tell how significant this factor is, and it will come down to sales. If there is high demand for ALT-A as they reset, then that will absorb the potential supply. But if not or if recasts or unemployment increase supply without the “move-up” market, we’re going to see a real imbalance that can only be corrected with a significant price shift. All things are possible, but I just don’t see the rosy scenario of increased demand as being very likely.