The world is built in such a way that when the sun shines in one place, it’s dark in another. Might even be a day early, or a day late, from one place to the next. Complicated. This picture could illustrate the contrasted, unpredictable and moody nature of the real estate market, whether here or anywhere on the globe. As we progressively move deeper into 2017, one may wonder where the sun will shine, and where the wind will blow.
After a year packed with extraordinary events, we know (or should know by now) that nothing is for sure. The world woke up in 2017 with a headache. In a climate of global economic uncertainty and political instability, it is a bit hazardous to make definite predictions about what’s in store for all of us dealing with the luxury market in the US, whether as Realtors, Sellers or Buyers.
More often than not, the high-end business sets the tone for the real estate industry. It is a barometer of sort. When it’s hot, it serves as a locomotive for the rest of the business. Price appreciation at the top progressively moves through the various price layers, from one coast to another. When it’s not hot, it also affects the real estate activity in all price segments and, eventually, in all regions.
If the past is a reliable guide for what’s coming, I can only observe that, all along 2016, the luxury market has been very erratic, as if we were closing in on the end of a cycle. Overall, on a national level, last year has been excellent in our industry (best since 2006) but force is to recognize that the big Mo favored the bottom half of the price ladder. Activity, in terms of units as well as prices’ increase, was fueled by a tsunami of transactions in those affordable markets most affected during the recession years.
The multi-million dollar property market that blesses many of the coastal regions, had a strange year. Mixed results. Prices, driven by the best of the best (top locations, brand-new or newer homes, fashionable style & design, all smart homes features…) went through the roof, while, at the same time, unit sales kept on shrinking. Considering what was going on in the world during this tumultuous year, this was no surprise.
We are, today, in year 2 of what feels like a transition. It would not be smart to expect a substantially different picture than the one we saw last year, although we’ll benefit from a faster start (2016 had the worst-ever annual start). US sales, mostly flat, will be up 3% at best. Same lukewarm prognostic regarding prices (up to 4% increase?). Of course, with a big change in Washington and a new driver at the wheel, we may be nicely surprised. We’ll see. No matter what, let’s look at what bodes well for our real estate market this year. Opportunities will abound for those who have the means, the brains and the guts.
- Rising cost of mortgage money: Yes, it is an opportunity. Federal funds rates have been near zero for over 8 years (can you believe it?). With the prospect of more increases and at a faster pace through the year, you can bet that the procrastinators who can afford to buy will finally get off the bench. Granted mortgage payments will go up a bit, but it is expected that wages will go up as well together with jobs creation and job security.
- Rising inventories: Price flattening will influence many sellers in putting their home on the market rather than wait in hope of more future equity build-up. Most have reached the point of diminishing returns. If would-be-sellers refinanced over the last 2/3 years, they may choose to wait a few years. The others will be smart to put a For Sale sign in the front yard right now.
- Growth strategy: The fiscal/economic stimulus package scheduled to be implemented ASAP, if nothing else, is already producing hope & confidence. That’s where the cycle starts. Short term, positive results are likely to be seen. Long term is too far away to even talk about. The pessimists predict a new inflationary cycle, as if it mattered today. It does not.
- New homes construction: Looking for a welcome albeit modest rebound after nearly 10 years of anemic growth, if not recession. Nobody is dreaming about a parity between supply & demand yet, but at least, builders are developers show some optimism thanks to a more positive business climate with less of the regulations and lending or local building restrictions which have harmed affordability (regulatory costs for builders have surged nearly 30% over the last 5 years).
- Only the best at the top: As we alluded to earlier, the very best luxury properties will continue to be gobbled up quickly. The “average” luxury home (good location but in need of TLC or major renovation or great home in a less desirable area) will grow old on the shelves… unless the price reflects the new reality of the marketplace. As reported by Zillow, the number of high-end fixer-uppers waiting for too few buyers (and more picky buyers), has gone up… 35% over the last 5 years.
- Foreign buyers: Regardless where they may come from, they have today less money in their pockets in a slowing and risky global economic environment. Not good for them, but very good for us. If they can afford to buy US real estate at a time when their currencies are shrinking in relation to the US dollar (at a 14-year high), they will. More than ever. Financial security is a great motivator. Case in point: we can debate forever about the slowdown in China but, with a host of billionaires, an army of multi-millionaires and a middle-class as big as the US population, Chinese buyers will still be the locomotive in our luxury market in 2017.