A house in the Hamptons that was on sale recently for $39-million.Mark Lennihan
Despite some signs that the worst of the U.S. residential housing crisis may be over, many wealthy homeowners are still being squeezed by the combination of weak home prices and the stock market crash.
"I think for wealthy homeowners it will get worse before it gets better," said Dennis Hedlund, founder of iEmergent, a forecaster for mortgage and real estate companies.
"I don't think home prices have bottomed yet. Many people are stuck at the high end, as there aren't many buyers out there," Mr. Hedlund said of owners of luxury properties.
From California to Massachusetts, the U.S. housing crisis came after years of easy credit and soaring property values. Towns like the western Chicago suburb of St. Charles saw an unprecedented growth of wealth, especially in high-end homes.
An hour by train from Chicago and known for good schools, St. Charles was a magnet for senior managers and professionals. But as the housing crisis that began in the subprime residential market spread up the property chain, the once-thriving high-end local market ground to a near halt.
"We've never seen anything like it," said Maurine Trafals, office manager at local realty agency Source One. "The market just stopped in the summer."
St. Charles, population 40,000, now has 74 homes for sale with buyers asking more than $1-million.
"That's a huge number to have on the market in a community of this size," Ms. Trafals said.
In 2009 five homes over $1-million have sold, compared with 21 in 2008. Prices are down 20 per cent from the peak in 2007.
"There are fewer and fewer potential buyers out there, as mid-range homeowners are getting squeezed," said Ray Schafer, co-owner of home builder Michael Raymond Custom Homes, whose firm has had a luxury home on offer here for more than a year.
Mr. Schafer has cut his asking price by $50,000 to just under $1.2 million, without drawing out any offers.
"We can't hold onto inventory forever," Mr. Schafer said. "So we're just lowering the price until it's such an extreme bargain someone picks it up."
The national luxury market is weak on both the buyer and seller sides, coast to coast. Wealthy homeowners have seen cash reserves erode from the stock market collapse, which also hit retirement savings. The big drops in home prices have squeezed home equity loans. And many high-earners have also lost jobs.
"High-end owners have been hit from all sides," said Cora Berkery, a realtor at Surterre Properties in Orange County, Calif., site of Disneyland and hundreds of million-dollar homes.
Many wealthy homeowners have held asking prices high in the hope of outlasting the 2-year-old property slump. But more are expected to slash prices in the coming year to avoid further losses or obtain cash, adding more properties to the market.
More unwanted supply of U.S. homes at the high end may also come from foreclosures. According to data from research firm First American CoreLogic, the rate at which wealthy homeowners are falling behind on their mortgage payments is increasing.
It says 9.4 per cent of those with jumbo prime mortgages - those over $417,000 - are 90 days or more behind on their payments. This pales next to the 33.8 per cent of subprime loans that are delinquent 90 days or more. But the rate is rising.
While the subprime delinquency rate is 1.3 times higher than a year ago, the jumbo prime delinquency rate is 2.6 times higher, suggesting that wealthy homeowners overstretched themselves financially much as their poorer counterparts did.
"The lower income brackets tend to have much of their equity tied up in their homes," said Sam Khater, chief economist at First American CoreLogic. "Those with higher incomes have a combination of stocks, bonds and home equity."
"During the boom they felt they could save less and borrow more," he said. "But they've taken a huge hit since the peak."
While California still paces the country in many of the worst aspects of the housing crisis, the plight of wealthier homeowners is now largely the same nation-wide, Mr. Khater said.
On a drive through Prairie Lakes, a development in St. Charles where $1-million 20-room homes stand barely 15 feet (4.6 metres) apart, Ms. Trafals points out homes for sale but also a few that are empty but still not on the market.
"Some home builders are waiting for things to pick up before they sell," she said, pondering this "shadow" market.
"Shadow inventory has become the industry buzzword over the past few weeks," said Michael Lefevre, head of the National Association of Mortgage Professionals. "There is a lot of property out there that is yet to hit the market and could mean 2010 will be worse than 2009."
Shadow inventory is a wild card. But Mr. Khater said the trend is significant enough that he is working on an estimate.
So the irony for wealthy homeowners is that the longer they wait the more they may have to cut their asking price. Realtors say sellers are awakening to the danger of a downward spiral.
Surterre Properties' Ms. Berkery said in the past few months she has seen more high-end homeowners "become proactive" and sell their homes at auctions at a massive discount.
"As corporate cost-cutting is moving up the management ladder, some people are taking matters into their own hands and selling rather than be forced to later on," she said.
Ms. Berkery said the most affected are the "lower-end" wealthy with homes valued at up to around $3-million, as they tend to be more overstretched than the super wealthy.
"The good news is property is selling, if at a huge discount," she said. "Most of the buyers we're seeing are foreign investors from the Far East and, now that the euro is stronger, we're seeing more Europeans too."