If Prices Are Decreasing, Why Are the Affluent Buying?
At hand is an captivating anomaly taking place in the real estate market. While house prices are falling, the rich are starting to shop. DataQuick Information Systems reported last week that sales on homes $1 million or more rose 18.6% last year after four consecutive years of decline. This is at the identical time that sales outside of this price point actually fell 2.8%.
And even more stunning is that homes over $5 million have also increased considerably. Housing Wire reported that:
In 2010, 975 homes sold in this bracket, up nearly 14% from the year prior.
Why would the wealthy be starting to purchase especially when everyone is reckoning that prices will soften? The people of wealth are informed of finances. They understand that the COST of real estate is a much more powerful than its PRICE. With the government attempting to make burdensome changes to the residential lending business, the wealthy know financing a home may never be better. They realize it is time to buy. They can purchase a million dollar+ home for a rate lower than at almost any time in history.
Rates are at unremarkable lows and the spread for jumbo loans has shrunk greatly. As CNN Money made clear:
Regularly buyers have to take out a jumbo loan to finance any mortgage beyond the $417,000 threshold ($729,000 in high-cost cities such as New York). These loans have higher interest rates because they are considered non-conforming - or higher risk - and are not backed Fannie Mae or Freddie Mac.
In 2009 buyers of high-end homes paid 1.8 percentage points more in interest than the average buyer. But in 2010, that spread had wilted to just 0.6 points more.
They can also fix that rate for 30 years. The 30-year-fixed-rate-mortgage may be a victim of the new lending reforms. Mark Zandi, chief economist of Moody's Economics addressing the administration's recent narrative on reform:
"A private system would likely means the end of the 30-year fixed-rate mortgage as a mainstay of U.S. housing finance. A privatized U.S. market would come to come close to overseas markets, predominantly offering adjustable-rate mortgages."
Bottom Line
Let's believe the rich aren't just lucky. Let's assume they built their wealth by making accomplished financial decisions. What have they telling you and I about real estate? It's opportunity to buy.
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