High End Homes Miss Out on Housing Rebound

The WSJ has a front page article exposing the dichotomy between the high and low-end of the housing market. Due to significant amounts of government stimulus aimed at fixing the housing market, the low end seems to have clunked to a bottom. Investors and first-time homebuyers are snapping up foreclosed properties at huge discounts and lower priced homes are selling nicely due to the $8,000 first time homebuyer tax credit and super-cheap financing offered by the FHA (3.5% down-payment anyone?), Fannie, and Freddie. The government stimulus stops short of helping those with higher incomes. The $75,000 income cap for singles and $150,000 for marrieds exclude higher income folks from the $8,000 tax credit. Furthermore, jumbo mortgages require 20-30% down-payments and have interest rates roughly 1% higher than conforming mortgages. The inventory statistics provided in the WSJ's article are quite telling. Current inventory for all housing is 9.4 months, down from the 11 month peak a year ago. Meanwhile, at the high-end (defined as homes priced above $750,000) inventory is at 17 months, up from 14.5 months a year ago.

Last week I wrote a post entitled "Has Housing Turned the Corner?," where I discussed the growing gulf between the high and low-end. It does not appear to be a political priority (and shouldn't be in my opinion) to help those looking to purchase a high-priced home. Consequently, those who wish to buy an expensive home have to cough up a sizable down-payment to qualify for a jumbo mortgage under much tighter lending standards. Forget the job losses and the economic downturn, the pool of buyers of high-end homes has shrunk significantly just because of the disappearance of cheap financing. Another interesting phenomenon noted in the WSJ is a change in overall perception about how much to sink into a new house. For many years, the industry (agents, mortgage brokers, and the like), which benefitted dramatically from rising home prices, preached the gospel of leveraging to the hilt to purchase the most expensive house you could barely afford. Homeowners believed in it and many built significant wealth from the growing equity in their houses. The idea of leveraging to the hilt is currently being turned on its head as homeowners discover the "benefits" of too much leverage in a down market. Leslie Appleton-Young, the Chief Economist of the California Association of Realtors declared with brio at a 2007 conference of real estate agents: "This is God's country. When is the 30% decline in Marin County's [a suburb of San Francisco] market going to happen? Not in my lifetime." Rest assured, Ms. Appleton-Young is still alive. I know this because the WSJ got another quote from her stating: "no doubt that the high-end housing prices have adjusted and will continue to adjust." She is clearly still an optimist as she continues to use the word "adjust" instead of coming right out and stating the painful truth that prices are lower, and will likely continue to go lower. Current buyers are more cautious and less inclined to put all their eggs into the housing basket. This shrinks the pool of high-end buyers even further.

The article is littered with stories of homeowners running into financial trouble who cannot unload their homes. The statistics support the anecdotal evidence; the divide between jumbo prime delinquency rates, currently over 7%, and conforming prime delinquency rates, which have yet to hit 5%, is growing. Remarkably, the jumbo prime delinquency rate shown in the article excludes option arms which would pull the delinquency rate even higher.

Given growing inventories, higher delinquency rates, tight financing, and changing attitudes among buyers, it seems inevitable that the higher end is due for more price "adjustments" (and not higher.) To quote a frustrated seller in Winnetka, Ill, an attorney who has commuted to DC for the past year while he waits to sell his home: " You're not sure if it's a price issue or if there aren't any buyers." Interesting that he fails to see the correlation between the two.