High-end home sale prices ticked up about 2% globally in 2016 from 2015, and the trend continued in the first half of 2017. The percentage of the asking price that sellers are actually realizing, known as the list-to-sale-price ratio, has fallen year over year worldwide, “signaling a buyers’ market,” Christie’s report found. This is particularly true at the highest end of the market. For homes listed at $30 million or more, the actual selling price averaged 75% of the listing price in 2016, down from 82% in 2015. Homes listed for between $1 million and $3 million sold at 94% of the asking price in both 2015 and 2016, says Christie’s.
New Reality
The last time sales of very expensive homes faltered was in 2007 and 2008. After the global financial crisis, many properties languished on the market for years until sellers dropped asking prices considerably.
Since then, rising incomes among the rich, coupled with tighter mortgage-lending standards for middle-class borrowers, led developers to shift their efforts toward the affluent market.
And the wealthy responded. Some purchased properties simply as trophy residences. Others bought for investment purposes, as low interest rates and equity volatility made real estate attractive by comparison.
Some wealthy foreigners bought in the U.S. to avoid taxes in their home countries or to store wealth in areas where it seemed less likely to be seized by governments or other creditors. Foreign buyers closed on a record number of U.S. homes between April 2016 and March 2017, a 49% increase over the same period from 2015 to 2016, according to the National Association of Realtors.
But home sales to rich foreigners are slowing. Declining commodity prices, such as those for oil, have affected buyers from the Middle East, and elsewhere. Moreover, to combat money laundering, the U.S. Department of the Treasury began last year to track purchases of multimillion-dollar properties by overseas buyers, especially those bought with cash through shell companies.
Recent capital controls in China have also curtailed wealthy buyers, thwarting their ability to move funds out of the country. “The crackdown by the government on extracting funds keeps getting tighter and that has had some impact on demand from China,” says Miller.
One key distinction between the slowdown in high-end real estate and the 2007-2008 crash is the virtual absence today of bubble-causing speculation. Luxury properties are simply too expensive for speculators. “No one is flipping $5 million condos,” says Miller.
Another difference is more cash sales. “With a bubble, I think of a market raging out of control faster than logic can support—with a lot of leverage. One thing we don’t have now is leverage,” says Miller, noting that, over the last few years, 80% of sales above $5 million in New York City were cash transactions.
Market Psychology
Understanding the needs and wants of discerning buyers, and getting top dollar for demanding sellers, requires a high level of service from real estate professionals. Buyers and sellers in the general market have “an expectation of a transaction being completed,” says Hartley. By contrast, at the highest end of the market they have “an expectation of expertise” because these deals tend to be complex, she says. Multiple parties may be involved, including the individuals or families the agent represents, as well as attorneys, accountants, investment advisors, estate managers and family office representatives.
“Family, friends, business managers. All kinds of people often chime in,” says Kofi Nartey, who frequently represents celebrities as the director of the Sports & Entertainment division with the Beverly Hills, Calif., office of Compass real estate brokerage (he’s also the author of the recently published book Sellebrity: How To Build A Successful Sports & Entertainment Based Business).
“The best approach is to try to get to the underlying motivations of each player in the deal,” says Nartey. “That will help dictate the information that’s useful to them and how you can work with them as opposed to against them.”
After consulting with a client’s business manager on a recent transaction, Nartey and the manager agreed that a home purchase was not appropriate. “The client makes millions and millions of dollars a year, but it was the best decision for them to shore up some other investments and do some financial planning prior to buying another property. Sometimes, it’s hard to tell clients ‘no.’ It’s their money. They want to spend it,” he says.
Nevertheless, the client accepted the advice and the business manager appreciated Nartey’s assistance. “That’s part of working with the different role players and understanding what each person’s motivation is,” he says.
Good luxury real estate professionals also understand the unique factors that influence prices at the highest end of the market, including location, rarity, provenance, privacy, security, architectural design and material quality. At the top 1% of the market, there are no “comps” or “comparables,” says Hartley. For these ultra-exclusive homes, there are only “relevant properties” that experienced agents can use as general guides to establish justifiable list prices and encourage sellers not to set extraordinary, or “aspirational,” prices. Unrealistic list prices cause potential buyers, even the uber-rich, to close their wallets, which in turn results in otherwise-desirable homes languishing on the market.
Nartey spends considerable time educating sellers about market conditions. As an example of “aspirational pricing as a marketing tool,” he cites the Playboy Mansion, the first residential property to sell for nine figures in Los Angeles.
Originally listed for $200 million, the iconic estate eventually sold for $100 million—a 50% price reduction.
Besides inflated prices, questionable décor can add to time on the market. “Over-the-top decorating, gold gilt and aqua kitchens” are most definitely “out,” says Olshan. “Nothing will kill a residential property sale quicker than really bad taste. And by the way, just because you hired a decorator doesn’t mean their taste is good either,” she says.
Even with the current softening in the luxury market, Olshan remains confident about the long-term prospects for residential real estate. “If you buy and hold, you’re usually going to make money,” she says.
“Since the start of my career in 1980, the market has been many more years up than down. When you hit a down cycle, you can’t lock into a loss. You just have to hang in there. It will return.”