With Case Schiller recently reporting the potential for a 30% appreciation in real estate value within the next 3 years, and Lawrence Yun, the Chief Economist for the National Association of Realtors, predicting a 10% jump in the hardest-hit real estate markets in Florida, Nevada, and Arizona, many homeowners of luxury real estate are breathing a collective sigh of relief. The luxury market in most areas didn’t experience as dramatic a drop of prices when compared to moderately priced neighborhoods. This was due in part to the fact that affluent homeowners had more staying power and could afford to carry properties until a market recovery occurred.
With all the recent positive news about real estate, it may appear as though their strategy of holding out on lowering prices was effective. Before this group celebrates the success of their strategy, they may want to look carefully at key market indicators. Although recent sales indicate that demand has improved, the supply of homes in many cases have not dropped. There is still an excessive amount of high-end inventory available for sale.
Depending upon the geographic area, in a healthy market there is typically an 8-12 month supply of homes for sale for properties valued at over $1 Million. It’s not uncommon in the luxury market of $1 Million+ homes to find a 40, 60, or even 80 month supply of luxury homes available for sale. It would appear as though values must drop significantly on the high-end before the glut of inventory can be absorbed. Despite the fanfare about the improving real estate market and recovering prices from experts such has Henry Case and Lawrence Yun, the luxury market still has a long way to go. If prices don’t drop, a long protracted recovery is likely in the high-end of the market.
In addition to the glut of inventory, an analysis of sales prices of luxury homes valued at over $1 Million, it’s very likely the demand of this product has increased because prices have dropped.
It’s important for every homeowner considering a sale to evaluate the key real estate indicators of supply, demand, consumption, and price as they apply specifically to their price point and area. No conclusions with respect to recovering real estate prices should be reached until the trends for the specific price point have been thoroughly researched.