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Mansion Prices Are Hitting New Highs

Author: Andrew Taylor

Following a four-year boom in the U.S. luxury real estate market, prices have dampened in all but a few markets amid global economic fears. There's volatility in China and Russia, and there's the oil issue in the Middle East, Dan Conn, CEO of Christie's International Real Estate, the luxury-property brand of the renowned auction house, told Bloomberg Business. I have no doubt there's an impact overall on the market.

Ritzy Enclaves the Exception

While most of the luxury markets have softened, prices have remained strong in ritzy enclaves such as Aspen, Colo.; Beverly Hills, Calif.; and the various Hamptons of New York's Long Island. According to market trend data from real estate aggregator Trulia.com, the median sales price in Beverly Hills (zip code 90210), for example, was $3.07 million during the Oct. 15, 2015, to Jan. 16, 2016, period. That represents a 41.1% increase over the previous quarter and an increase of 52.5% from the prior year. The average price per square foot has increased 32.4% year over year (to $1,086) and 66% over five years ago (when it was $656).

In East Hampton the real estate market has experienced a similar trend: The median sales price – about $1.3 million – is up 58.9% year over year. And a record number of homes in the Hamptons sold for more than $5 million (62 sales), or more than $10 million (26 sales), during the fourth quarter of 2015, according to data from Douglas Elliman, the largest residential real estate brokerage in the New York metropolitan area.

That same quarter the average sales price in the Hamptons reached an all-time record high (in the 11 years this metric has been tracked) of $2.39 million, up 15.6% compared to the same quarter in 2014. The luxury market – the top 10% of the market – was especially strong: Its median sales price jumped 19% to $8.3 million, and its average sales price rose sharply as well, up 12.5% to $12.3 million. With all the discussion about the top of the market in the city [New York] softening or slowing or cooling, the Hamptons this quarter turned out to be contrarian, Jonathan Miller, president of appraisal firm Miller Samuel, told real-estate publication The Real Deal. (For more, see Is the Hamptons Real Estate Market Getting Too Hot?)

That timing – sales in the last quarter of the year – is unusual. One thing that we've seen since the financial crisis is that at the high end of the market, meaning north of $5 million, we're seeing a growing shift to more of these high end sales in the last quarter of the year, said Miller. If we look prior to the financial crisis, that pattern doesn't exist.

The timing is also important: Despite growing fears about China and global economic growth, the wealthy still view real estate as a strong investment. There's a general perception that the luxury market across the U.S. is weaker than the middle or lower end, said Miller. But in the most highly regarded areas, like Beverly Hills, the market is strong.

Supersize Mortgages

Even though some buyers could pay cash for mansions, many opt for mortgages. Loans that exceed conforming loan limits ($417,000 for single-family homes in most markets or as high as $721,050 in certain high-cost housing markets) are classified as non-conforming or jumbo mortgages. Super jumbo mortgages typically apply loans ranging from $2 million to $20 million – and up.

This continues to be a good time for mortgages (see How the Interest Rate Rise Affects Mortgages). While it seems lenders would view super jumbos as high-risk loans – the payment on a $6.5 million mortgage is about $30,000 a month, after all – many view them as good opportunities. Frequently, super jumbo borrowers have established relationships with a bank, often with the private-bank division, which offers a variety of wealth-management services, according to Mike McPartland, head of investment finance for Citibank Private Bank North America. Chances are we know the client, says McPartland. We know what we are comfortable advancing to that client.

The Bottom Line

While it's true that prices in the American luxury real estate market have dampened in many areas recently due to the falling price of oil and economic volatility in China and Russia, that's not the whole story. In the higher-end locales, such as Beverly Hills in California and Long Island's various Hamptons in New York, prices remain high, even record-setting. In these areas the wealthy still see real estate as a good investment. (For more, see Tips for Buying Luxury Real Estate.)

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