High-end housing sits out the "rebound"

Today's "must-read" housing story comes via this Wall Street Journal article($) about how the high-end has been a noticeable non-participant in the recent improvement in home sales in most of the nation's real estate market.

High-End Homes Frozen Out of Budding Housing Rebound
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. But on the upper end, sales remain mired in a deep slump and price declines are expected to accelerate.

Signs of the divide are visible across the country, including in suburban Chicago. In middle-class Schaumburg, Ill., which had a median income of $65,000 in 2007, sales were up 41% in June from the depressed level of a year earlier and bidding wars have broken out on some properties. "I can't even tell you how many I've been in over the last two months," says Joe Stacy, a local real-estate agent.

But 25 miles away in the affluent town of Kenilworth, with a median income of $230,000, home sales have stalled. While there are 65 homes on the market, just 13 have sold this year. "We're extremely oversupplied," says Sherry Molitor, a local real-estate agent. "Sellers are struggling to realize that we're back to 2001-02 prices."

Amid all the confusing press reporting and realtor talk about the housing market these days there are two very important sets of factors that are all too easily overlooked by the population in general - sales volume vs. price direction and low-end versus high-end.

Add to this the local market dynamics all around the country and the fact that nearly everyone today - buyers, sellers, realtors, economists, politicians, housing analysts - just want home prices to start going back up again so we can all return to the "normal" of earlier in the decade ... then, it's no wonder that even the more level-headed observers of the housing market are getting a bit confused these days.

One thing there doesn't seem to be any confusion about is today's high-end housing market...

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 to 4.4% of the housing market in 2007, according to the National Association of Realtors.

Still, the distress in high-end market has implications for consumer spending: the top 10% of U.S. households in terms of income accounted for 23% of consumer spending in 2007, according to government statistics. As those households watch their home equity evaporate, they are more reluctant to spend on housing upgrades or other items.

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 J.P. Morgan Chase & Co. said it would take until at least 2012 for the expensive-home market to recover and that peak-to-trough declines could surpass 60%, compared to 40% for the rest of the market.

Defaults are rising, too. Among prime mortgages, jumbo mortgages are now leading delinquencies and defaults and are the fastest-rising category for defaults of all types of mortgages. The rate of 60-day delinquencies on prime-jumbo mortgages jumped to 7.4% in May, from 4.5% in November, according to First American CoreLogic. By comparison, 60-day delinquencies on prime-conforming loans reached 4.9% in May, from 3.6% in November.

A recent survey by the NAR found nearly three-quarters of real-estate agents said buyers were purchasing smaller houses due to tighter credit requirements. "We're in a 'trade-down' environment for the first time since the 1930s," says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.

Around here (Bend, Oregeon), the supply of unsold homes priced at over $400,000 stretches into the years - and not just one or two years.

About a mile down the road there are two homes for sale across the street from each other, both with magnificent views of the Cascades - one's bank-owned and they're asking $700,000 and the other one is a short-sale at $1.3 million.

In our zip code, with hundreds of homes for sale in the $400,000+ price range, there have recently been only a few sales each month - do the math and you'll see that the owners of the two homes with wonderful Cascade views might have quite a wait ahead of them.