With all the turmoil in the financial markets recently, it’s not surprising that the value of luxury homes in the tri-state area has been reduced in recent months.
Connecticut is a good example. It is the wealthiest state in the union, per capita. The average home value is over 30% off of its recent highs. Similarly, inventory is up over 20%.
Like the rest of the luxury market in the area, the Connecticut real estate market is strongly affected by the health of the financial markets. Here, the picture continues to be grim, looking ahead at least as far as the beginning of 2009.
The chairman and CEO of JP Morgan, for instance, recently held a conference call wherein he noted that his investment firm expects losses on their prime loans to triple in the next several months.
Despite the difficulties in the area, the luxury market within the actual city lines is especially strong. Some long-term trends and global political, economic factors are responsible for this. The weak dollar is perhaps the most crucial stimulant for high-end New York City home values.
A longer historical perspective reveals another important factor, however. It used to be that the wealthy sought to raise their families outside of the city, which was overcome with crime and a horrible public education system. Nowadays, however, more and more well-to-do parents are raising their families within city limits.
This relocation of a particular class of consumer into the New York City real estate market has created a strong, long-lasting boost in demand for luxury homes.
While the luxury market within city limits has performed incredibly strongly over the past several years – weathering even the current storm with strong numbers every quarter – much of that success has been concentrated in the high end of the high-end market. More marginally luxury apartments have not enjoyed the same level of invulnerability to broader market conditions.
Within the super-high-end market, it has become common for many recent buyers to put their homes back on the market, with the hopes of finding a buyer who falls in love with the place and is willing to provide the current owners with a tidy profit.
One reason for the disparity between the two halves of the luxury market is interest rates. Most buyers that purchase homes for tens of millions of dollars have little to no need for any financing. With the recent change in interest rates, however, those that took out loans with floating rates for several million dollars or more are facing some pretty severe interest payments that eat into their liquidity in a big way.
In the end, though, that factor is just one more aspect of the old maxim that the rich get richer – and the rich get a whole lot more productive.