Luxury homes used to be immune to market downturns, but this recession is different. The housing market is volatile at all price levels.
While low and moderately-priced housing markets have taken off in many parts of the country, the higher-end market is still struggling. Sales are slow and more price declines are imminent.
The problem in the luxury homes market was exacerbated by job losses, resetting of adjustable-rate mortgages held by loan borrowers, as well as lack of availability and tighter credit for jumbo loans ( above $729,750 ) which in turn creates shortage of buyers for the luxury homes.
Here are some reasons for caution when investing in high-end homes:
- Jumbo defaults. The delinquency rate for jumbo loans is 6.9 percent, three times higher than the rate for regular conforming loans.
- Fewer buyers. The number of buyers for $1 million-plus homes is shrinking as the economy falters.
- Wealthy areas are hard hit. Home prices in California, Nevada, and New York have fallen the farthest.
- The rich are in debt too. From 1995 to 2004, the top 1 percent of Americans in terms of wealth more than doubled their mortgage and residential debt to $494 billion.
Analysts at J.P. Morgan Chase & Co. recently predicted that the higher-priced housing market won’t recover until at least 2012, and market declines could surpass 60 percent, compared to 40 percent for the rest of the market.
In the Washington, D.C. area, Arlington, Virginia, is the only area that was immune to the market decline – although it did also experience some downward market shift. Nevertheless, 2009 prices are well above the 2004 price level.
SOURCE: The Wall Street Journal
