At the upper end, sellers take a beating

Not only are sales slumping at the upper end in the U.S., but those properties that find buyers are selling at distress prices.  And some say it can get only worse.

There is ample evidence of problems on high.  For example, the Case-Shiller composite indices show an increase in median prices in the 10 and 20 cities it tracks.  But the medians aren’t going up because housing prices in general are rising; prices seem to be going up only because falling prices for more expensive properties now starting to be sold are dragging the median up.

Case-Shiller is value-weighted, which means that repeat transactions on expensive homes have an outsized impact.

An analysis of 390 metro areas by John Burns Real Estate Consulting found that 39% of markets are now reporting a month-over-month increase in the median price, up from 22% of all markets two months ago, according to the Wall Street Journal.  There’s considerably more detail on the U.S. housing market in the last two issues of my biweekly newsletter.

“What is really happening is that people are now comparing the price on a 3-bedroom home in a typical neighborhood to the price on a 3-bedroom home in a poor neighborhood–because that’s what was selling several months ago,” says the consultant’s report.

Housing is fast dividing into two markets: Sales of low- and moderately priced homes are picking up and values have stopped falling in some parts of the nation, the Journal notes in a subsequent report, published yesterday and liberally quoted here. But on the upper end, sales remain mired in a deep slump and price declines are expected to accelerate.

The divide between the mass market and the high-end — generally defined as homes that cost above $750,000 — partly reflects the effects of Washington’s housing-rescue plan, which is producing winners and losers.

Policymakers have helped spur sales of lower-priced homes by offering first-time buyers a federal tax credit of as much as $8,000, by driving mortgage rates to near 50-year lows and by expanding the mission of the Federal Housing Administration, which will guarantee mortgages for consumers buying homes with down payments as low as 3.5%.

Sales at the lower end are also helped by the large number of foreclosed homes that banks have dumped at fire-sale prices, which has pulled down values of neighboring houses and sparked bargain hunting. Prices in both Las Vegas and Phoenix are down more than 50% from their peaks of several years ago, according to the S&P/Case-Shiller index.

Home prices tracked by that index rose 0.5% for the three-month period ending in May versus the three-month period ending in April, the first monthly gain in nearly three years. Prices have shown signs of stabilizing in recent months as the share of distressed homes, including those that sell out of foreclosure, falls from highs reached earlier this year.

Low prices have ignited a home-buying boom in some markets. In June, sales of single-family homes in the Las Vegas area were up about 70% from a year earlier.

For affluent buyers, it’s a different story.

The $8,000 tax credit for first-time homeowners phases out for single buyers whose incomes exceed $75,000, or married couples earning more than $150,000. Low-interest-rate mortgages backed by the FHA and government-controlled mortgage companies Fannie Mae and Freddie Mac are only available on loans below limits set by Congress. Last year, Congress increased those limits to $417,000 in most markets, and to as high as $729,750 in certain high-cost markets, including parts of Hawaii, California, New York and Washington, D.C.

Mortgages for amounts that exceed those limits are called “jumbo” mortgages, and face higher interest rates. Last week, the average rate on a 30-year mortgage below the limits was 5.42% compared with 6.33% for jumbos, according to HSH Associates, a financial publisher.

Extremely wealthy people may not need a mortgage. But buyers who take mortgages for expensive homes generally face higher rates and tighter lending standards. Most banks that offer jumbo mortgages are generally requiring down payments of 20% to 30% or more, knocking out potential buyers who don’t have much equity in their homes and have seen retirement savings fall.

While subprime mortgages sparked the first round of housing problems two years ago, now “troubles are lurking further up the food chain,” says Joshua Shapiro, chief U.S. economist at MFR Inc. White-collar job losses have accelerated while more adjustable-rate loans to prime borrowers are resetting to higher payments. “You put all that together, it leads me to believe that the next leg down on home prices is going to come from the top,” he says.

To be sure, the affluent housing market is substantially smaller than the mass market. Sales of existing homes priced over $750,000 accounted for 2.3% of all sales in the first quarter of this year, compared with 4.4% of the housing market in 2007, according to the National Association of Realtors (NAR).

Inventory of expensive homes is rising. Overall, the inventory of unsold homes in June was enough to last 9.4 months at the current selling pace, down from 11 months a year ago, according to the NAR. But the supply of unsold homes priced above $750,000 swelled to around 17 months in June, up from a 14.5-month backlog one year ago.

A recent forecast by analysts at JP Morgan Chase said it would take until at least 2012 for the expensive-home market to recover and that peak-to-trough declines could surpass 60% in contrast to 40% for the rest of the market.

In Manhattan, the luxury market has been especially hard hit.  And it’s been slower to recover than the rest of the nation.  At the same time, it was slower to sag, and thus will be slower to recover.  The Big Apple’s dependence on Wall Street–super bonuses notwithstanding–is having an outsize effect on the housing market here.

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Malcolm Carter
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022

M: 347-886-0248
F: 347-438-3201

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