Expensive homes miss the recovery

The housing market may be showing signs of life, but you wouldn't know it by all the high-end inventory sitting around.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Maha Atal, contributor, and Scott Cendrowski, reporter

Million-dollar misses
These luxury homes have been stuck on the market for months.
When do you think the economy will improve?
  • Next year
  • Over the next few months
  • Not for at least a year
  • It's already on the mend
Mortgage Rates
30 yr fixed 3.80%
15 yr fixed 3.20%
5/1 ARM 3.84%
30 yr refi 3.82%
15 yr refi 3.20%

Find personalized rates:
 

Rates provided by Bankrate.com.

NEW YORK (Fortune) -- In recent weeks, mortgage brokers, bankers, and even Fed Chairman Ben Bernanke have been talking about a housing rebound later this year. And the figures seem to back up their optimism: New home sales rose 11% in June for the third consecutive month.

But for San Diego-based broker Tricia O'Brien, the recovery has been uneven at best. Her mid-size, mid-priced homes are selling at close to their listing price within a week -- but larger, luxury homes aren't moving at all.

One five-bedroom bungalow by the beach has been hanging over her, at $1.2 million, since January. The owners, who bought the house as a second home, aren't willing to lower the price, but they need to sell it to pay off debt borrowed against it during the boom. In the meantime, they're renting the place out to their own children.

"We are advising sellers, if they aren't going to be willing to drop the price significantly, that we just won't take their business," says Las Vegas Realtor Andrea Wells, who has had similar experiences. Otherwise, "it costs too much for us to try."

The combination of sellers' reluctance to lower prices and the lack of buyers has led to a significant overhang in inventory.

"Right now it's taking 20 to 40 months [to sell a high-end home], says Pat Lashinsky, CEO of Emeryville, Calif.-based brokerage firm Zip Realty. "Not because there are so many more homes, but because so many fewer of them are selling."

And the supply of high-end homes is growing.

At the current pace, today's inventory of homes priced at more than $750,000 would take 16.8 months to sell, compared with about 14.5 months a year ago, according to the National Association of Realtors. That's nearly double the overall housing market supply of 9.4 months.'

This overhang is pushing prices down. For example, the median sale price for a home in New York City suburb Greenwich, Conn., fell by 24% to $1.5 million this year as sales declined by more than half, according to Prudential Connecticut Realty.

There are three major causes for the high-end housing glut. First, buyers who make more than $75,000 a year aren't eligible for the government's $8,000 tax credit for first-time homebuyers. Second, the jumbo mortgage market (loans for homes priced more than $417,000 in most cities -- up to $729,750 in high-cost areas) remains tight. And finally, as a result -- and for the first time in recent more than a decade -- Americans are buying smaller homes.

There's a gap in tax policy where housing credits are concerned. An $8,000 tax credit for middle-income, first-time buyers has helped clean out inventories of small starter homes, but no comparable credit exists for wealthier buyers.

What's more, though mortgage reforms passed earlier this year helped bring down rates for mid-priced homes, the jumbo mortgages wealthier buyers need aren't covered by Fannie, Freddie, or the FHA, making Uncle Sam part of the problem, says Lawrence Yun, chief economist for NAR.

"Some of the super-wealthy who are buying homes all-cash are not restricted by mortgage availability," Yun says. "That market is still functioning as normal. Just underneath that, people require jumbo mortgages -- and those they can't get."

That's forcing buyers to go small. A May survey of real estate agents by NAR showed that 73% of buyers traded down because of difficulties getting credit. (Census data shows that U.S. homes shrunk in size last year for the first time since the mid-1990s.)

Where sellers of smaller houses used to graduate into the million-dollar range, many are now staying put. Indeed, says Lashinsky, "since most of the sellers are distressed sellers in short sales, they might move down rather than up."

Mark Fleming, chief economist for real estate data firm First American CoreLogic also sees the problem as one of demand. "[Sale] prices aren't falling," he says, "because prices only fall when there is a realized sale. You can't drop price if there's no demand to meet."

Demand is especially low in places -- like San Diego, Miami Beach, or Las Vegas -- where the oversupply of million-dollar properties reflects a surge in second-home investments during the boom. But with vacation buyers gone, the market must depend on locals, and Fleming believes there's no price point at which locals will buy up those properties --because locals were never the buyers.

For all these reasons, a high-end recovery will come much later than the rebound some analysts are already predicting in the rest of the housing market. J.P. Morgan Chase mortgage-bond analysts estimated earlier this summer that these high-end prices may not bottom out until 2012, when prices will be down 60% from their peaks. To top of page

Find mortgage rates in your area


Company Price Change % Change
Comcast Corp 47.30 -0.20 -0.42%
Kinder Morgan Inc 20.93 -0.43 -2.01%
Williams Companies I... 23.01 -0.85 -3.56%
Hewlett Packard Ente... 14.90 -0.20 -1.32%
Host Hotels & Resort... 17.59 -0.29 -1.62%
Data as of Jan 21
Index Last Change % Change
Dow 29,196.04 -152.06 -0.52%
Nasdaq 9,370.81 -18.14 -0.19%
S&P 500 3,320.79 -8.83 -0.27%
Treasuries 1.77 -0.07 -3.65%
Data as of 7:26am ET
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Sponsors
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.