In a time where most real estate markets have declined and many experts argue that the bubble has indeed burst as home prices are increasing much less slowly than they were a year ago [1], the trend in luxury home sales is far from declining. [2] Luxury home sales have been booming, and not just in retirement areas such as Arizona, Florida, and Nevada [3], but in other areas of the country including Manhattan and California. [4] This trend has also been recently recognized internationally in Russia, Great Britain, and Canada. [5] So, why are the luxury markets booming while the housing market in general is tanking? The answer lies in an exploration of the population, economics, and employment rates. [6]
According to the Institute for Luxury Home Marketing, a group comprised of Realtors and members of the National Association of Home Builders, luxury homes are those considered to be in the upper tier of available housing in any given market.[7] Homes are categorized as "luxury" by looking at the specific geographical market and taking the higher amount of the top 10% of sales in that market or $500,000. [8] Thus, a home must be worth upwards of $500,000 to be considered "luxury" regardless of geographic location.
So, what ultimately explains the continued growth of the luxury market while the overall market is in decline?
One explanation for the thriving luxury home market in the United States is that the population in the United States is growing older. Members of the baby boomer generation have started retiring in great numbers, with many of those retirees having accumulated sizable savings accounts. [9] Seventy-eight million people represent the baby boomer generation and one in four of those people has a net worth of at least $500,000. [10] Those boomers are cashing in on their accumulated earnings to retire in style in popular retirement locations such as Arizona, Florida, and Las Vegas, where luxury housing is dominating the market. For example, in Phoenix, Arizona, in the year 2000, 440 homes sold for more than $1 million, compared to the first 10 months of 2006 where 2000 homes sold for $1 million or more. [11] While a small portion of this significant increase in the luxury market might be due to inflation and growth of housing markets in general over the past few years, this trend and the enormous increase over the past 6 years in number of houses sold demonstrates that the luxury home market is growing and will likely only continue to grow in the future as the population ages and more people retire with sizable nest eggs.
An alternative explanation for the steady growth in luxury home markets has to do with simple economics. According to Scot Spalding of the Luxury Home Council, "[t]he fundamentals are still strong for affluent buyers. They have a strong economy, strong GDP growth, low unemployment, and a booming stock market." [12] People purchasing homes in the luxury market are generally unaffected by economic trends that tend to bring the housing market down among the middle-class. In the luxury market, purchasers are those with increased household wealth who can afford to purchase homes even in times of accelerating market prices. [13] Estimates for 2006 sales indicate that 11% of homes sold on the luxury market were in excess of $5 million. [14] Considering the rising salaries of professionals and the record bonuses awarded by Wall Street firms for 2006, it seems that as more disposable income accumulates, the luxury housing markets will continue to grow. [15]
Thus, as the baby boomers age and retire with sizable savings and the salaries of professionals continue to rise, it seems that the luxury home sector of the real estate market will only continue to thrive, even in the face of a generally declining real estate market.
Sources
[1] See Robert Z. Aliber, Real Estate Recession Coming, N.Y. Sun, Sept. 12, 2006,http://www.nysun.com/article/39480?page_no=2&access=320298; see alsoMortgageNewsDaily.com, Luxury Home Sales Hold Their Own in Down Housing Market (Jan. 17, 2007),http://www.mortgagenewsdaily.com/1172007_Luxury_Homes.asp (last visited Feb. 2, 2007).
[2] See, e.g., Jim Remley, Luxury Housing–The Silver Lining in a Stormy Market?, Jan. 26, 2007,http://promo.realestate.yahoo.com/ (last visited Feb. 1, 2007).
[3] Id.; see also Luxury Home Sales Jump 33%, Silicon Valley/San Jose Bus. J., Feb. 24, 2006,http://www.bizjournals.com/sanjose/stories/2006/02/27/newscolumn1.html?page=3.
[4] Remley, supra note 2.
[5] See MortgageNewsDaily.com, supra note 1; Tony Wong, Luxury-home Sales Outpace Overall Market, Toronto Star, Nov. 25, 2006, at D1.
[6] See Remley, supra note 2.
[7] See MortgageNewsDaily.com, supra note 1.
[8] Id.
[9] See Remley, supra note 2.
[10] Id.
[11] Id.
[12] Id.
[13] CnnMoney.com, Record for Luxury Home Sales,http://money.cnn.com/pf/features/lists/lux_markets_2004/ (last visited Feb. 2, 2007).
[14] See MortgageNewsDaily.com, supra note 1.
[15] Id.