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Luxury boom changes the housing market

April 30, 2005|by JAMES M. WOODARD/Copley News Service

It seems that only a short time ago the luxury home segment of the residential real estate market was just a tiny sliver of the entire real estate pie. In fact, that piece was so tiny that it was seldom addressed in real estate columns.

In recent years, high-priced luxury residences have become a major segment of home sales. Their sales soared by 31 percent in 2004 alone, reports RELO, a relocation referral company. RELO, with 650 member companies, is also one of the nation's largest real estate networks.

Homes with an average minimum cost of $1 million are found in virtually all markets nationwide. In some particularly affluent areas, such as coastal California and metropolitan New York City, the luxury home threshold is four or five times higher than $1 million, says Pamela O'Connor, RELO president.

"To put this in perspective, the average threshold for luxury homes five years ago was more like $750,000, so these prices have increased by about 30 percent in a relatively short period of time," O'Connor said.

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While in most markets the least expensive price for luxury homes might be $1 million, the average national sales price for luxury homes was about $1.8 million, according to RELO. Luxury homes represent about 5 percent of all homes sold.

The highest concentration of luxury homes is in the San Francisco area, followed by Southern California's coastal communities, RELO says. Washington D.C., Miami, Chicago, Phoenix, Vail, Colo., and Denver also have high concentrations of luxury homes.

Historically, low mortgage interest rates and unprecedented wealth were key factors in a luxury home boom, O'Connor said. Also, there's a new kind of second home emerging in the marketplace. While 20 years ago the second home was a small cottage at the beach or in the mountains, today it's likely to be a home that is more palatial than the owner's primary residence.

The marketing of a luxury homes has become a highly specialized niche. It takes know-how to present property to buyers who have the wherewithal and desire to make such a purchase. It often requires national or even international exposure to find the right buyer.

An increasing number of brokers specialize exclusively in listing and marketing luxury homes. Because of the high prices, the rate of commission is often negotiated down to what the owner feels is reasonable.

Q: Is the purchase of existing mortgage notes a good investment?

A: An increasingly popular way to invest in real estate is to buy existing loans or notes from people who accepted the note in lieu of cash when selling a home. This is called a secondary market note purchase or seller-financed note acquisition.

In many cases, the home seller would have preferred a cash transaction when selling his property, but settled for all or partial installment payments in note form to meet requirements of the buyer. After the sale is consummated, the seller is often open to a chance to convert that note into cash, even though he may have to discount the note substantially - the price of the note being less than the balance due.

The amount of discount is usually based on a time-tested formula. Generally, the higher the interest rate and shorter the term of the note, the lower the discount rate. Discounting makes the note more attractive to purchase. Also, many payers on the note pay off their obligation early, thus further benefiting the note buyer.

If you're interested in this type of investment, you can access the Web sites of many brokers who would love to suggest possible investments and handle the transaction for you - for a commission or fee, of course. Or you might find opportunities in your community on your own.

Q: To what extent will home prices increase in 2005?

A: Home prices are expected to rise again this year, but not nearly at the rate of increase we've seen during the past few years. Buyer demand will also decrease in intensity, predicts the National Association of Realtors.

Sales of existing homes, including single-family homes and condominiums, should ease by 2.4 percent to a total of 6.6 million units this year, NAR projects. There are still a lot of sales taking place. The volume this year will probably be only second to the record number sold in 2004.

New home sales are forecast at 1.14 million this year, also the second-highest volume. Housing construction starts are expected to rise 1.4 percent for 2005.

"The simple fact is we still have more buyers than sellers in most local markets throughout the country," said David Lereah, NAR's chief economist. "This supply-demand imbalance is continuing to put pressure on home prices, but we should get closer to equilibrium by the end of this year."

Q: What is the federal government doing to encourage the production of more homes?

A: A new homeownership tax credit bill has been introduced on Congress. If it passes, the bill could make homeownership possible for thousands of additional working families.

The bill - "Renewing the Dream Tax Credit Act" - would spur the production of more affordable housing and create new jobs in many communities, says a report by the National Association of Home Builders.

"This new bill is sound public policy and makes good economic sense," said David Wilson, NAHB president. "When enacted, the legislation is expected to stimulate the construction of 50,000 new or rehabilitated homes each year and create 120,000 new jobs annually."

Send inquiries to James M. Woodard, Copley News Service, P.O. Box 120190, San Diego, CA 92112-0190. Questions may be used in future columns; personal responses should not be expected.

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