The luxury real estate market is growing across the United States, especially in California. We have asked Chad Dannecker of Dannecker & Associates, an experienced realtor located in downtown San Diego, to analyze the ongoing trends and identify the reasons behind the present growth.
Current Trends
Luxury homes - those priced at $1 million or more - were sold at a higher rate than at any time during the past six years according to DataQuick, a real estate research firm headquartered in San Diego. During 2013, the total number of million-dollar homes was 39,175, which was a sharp increase over 26,993 in 2012. It is still significantly lower than in 2005, when DataQuick counted 54,773 homes that sold for at least one million dollars. Even so, the 45% increase year over year indicates significant improvement in the luxury market.
While the number of million-dollar homes fell short of the all-time high number, that was not the case with properties selling for more than $5 million. Across the state, there were 840 homes sold in this price range, as compared to 596 the year before. Homes priced between $3 million and $4 million also saw an increase, jumping from 1,108 in 2012 to 1,455 in 2013.
Not only are more homes priced at more than $1 million selling, but DataQuick also reports that a good number of buyers are paying cash for them. In all, 10,602 buyers purchased luxury homes with cash, amounting to around 27% of all home sales in this category. The amount of time a million-dollar+ home spent on the market also decreased by a whopping 47% according to Christie’s International, a luxury real estate firm that specializes in selling elaborate Orange County, California properties. As such, the average length of time it takes to sell one of these homes is now only 77 days.
Most of the homes in this category were existing structures, as only 6.9% of new construction accounted for luxury home sales, however this was still a 4.9% increase over 2012. The average price per square foot also increased in this market segment, jumping from $637 in 2012 to $682 in 2013.
Locations in the spotlight
According to data obtained from Christie’s, the luxury market seems to be doing extremely well in Southern California, particularly Los Angeles, Orange and San Diego counties. Some cities that saw dramatic increases in luxury home sales include Manhattan Beach in Los Angeles County; La Jolla in San Diego County; and Newport Beach in Orange County. Markets such as Beverly Hills and Pacific Palisades, both of which are in Los Angeles County, remain strong when it comes to luxury home sales as well.
In Northern California, the primary growth has been noticed in and around the San Francisco Bay area. For example, Brentwood, which is located on the Eastern Bay, had a total of 371 million dollar homes sold in 2013, as compared to 344 the previous year. The most expensive home in that category netted $16 million.
More in general, in the last 12 months many of the most expensive property markets in California and the rest of the country have witnessed the typical signs of the upward part of the cycle, from limited supply to the resurgence of flipping strategies.
Reasons for growth
According to DataQuick president John Walsh, the luxury home market in California is less dependent on traditional factors that drive real estate sales. Instead, he claims that home sales in this range are more likely to be affected by changes in the stock market or how well other alternative asset classes are doing, rather than the unemployment rate or mortgage interest rates. The greater the price of the home, the more this appears to be true. He claims that homes selling between $1 million and $2 million tend to be more responsive to traditional factors than those priced over $2 million do.
In an article explaining why millionaires see real estate as a top investment in 2014, Bloomberg quotes Gary Kaminsky, a vice chairman at Morgan Stanley Wealth Management in New York who recently stated that “wealthy investors see stocks getting expensive and interest rates staying stable or even declining over the next couple of years. That’s why they are looking more closely at alternatives, including real estate, for returns and income”.
According to the Wealth Report recently published by Knight Frank, the number of UHNWIs in North America has increased by 3,5% in 2013 and it is expected to grow 28% globally in the coming decade. Considering that, albeit with regional and cultural differences, UHNWIs invest 20% of their wealth into real estate, 72% of which into residential properties, it is reasonable to predict that the demand of luxury properties will be rising, especially in those locations, like California, that attract wealthy international buyers.
Christie’s International claims that the number of people who are relocating to the Los Angeles area has contributed to an increase in luxury home sales there. They also claim that the property market in Los Angeles, similarly to the market of other global property hubs such as London, New York or Hong Kong, can be compared to the “global capital market”, in that it attracts investors around the world because of the city’s cultural amenities and scenic beauty as well as its stable and relatively liquid market.
I also expect that luxury home sales in California will increase steadily over the coming years, as people become more and more comfortable with investing in real estate again. How much of an increase will likely depend on whether or not the stock market holds steady, as well as how quickly home prices escalate.
Author Bio: Chad Dannecker is the team leader of Dannecker & Associates, a real estate agency located in San Diego, California. With over 40 years of combined local real estate experience, Dannecker & Associates have established themselves as the leading source for information on condos for sale in San Diego.
Have you recently bought or sold a luxury property in California? Do you know any of the local markets well? What is your view of the luxury real estate market in the country? Contact us or share your experience with our readers below.
In the past we published a practical overview of property investment strategies here.
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