- The Washington Times - Friday, September 4, 2009

Luxury homes are selling at a snail’s pace as potential buyers have been forced out of the market due to a decrease in finances and increased lender restrictions. Sellers, real estate agents, home builders and mortgage bankers feel the effects of a down economy as these high-end homes languish.

Nationally, at the current sales pace, there’s about a 40-month supply of homes priced at $750,000 or more on the market, according to the National Association of Realtors. That is more than double the supply just two years ago.

“The luxury home market has been affected by the economy more than any other [housing] market,” said Desiree Callender, broker and owner of Desiree Callender and Associates Realtors in Bowie. “The inflation we had from 2004 to 2006 touched all of the markets, but the deflation is greater in the high-end market.”

Experts say that luxury home markets around the country are performing poorly, and it’s not unusual to see dramatic decreases in asking prices. As inventory levels continue to grow, price reductions follow.

The Institute for Luxury Home Marketing (ILHM) surveyed the metropolitan area’s top 10 ZIP codes with median prices more than $500,000 to study price trends. During the past year, homes in the Washington area decreased their asking price by 35 to 42 percent.

Barbara Zuckerman of TTR Sotheby’s International Realty in the District agrees that the local luxury home market has been affected by the economy and adds that this is especially true in the suburbs.

“In some of the most beautiful suburban neighborhoods where houses never sat for long in past years, they are now sitting for months and months. For homes over $2,000,000, it seems as though buyers are backing off, waiting for prices to drop, and then there is still a lot of hesitation,” Ms. Zuckerman said.

To further complicate matters, Ms. Callender said, it is difficult to get financing in the jumbo-loan market. If the home is more than $650,000, it can be particularly challenging for potential buyers to secure a loan. She adds that everyone is price conscious these days and even luxury clients have limits to how high they are willing to go.

Janice Coffey, a Realtor and home stager with Long & Foster Real Estate Inc. in Bowie, adds that “finding qualified buyers in the luxury market has become increasingly harder with the restrictions lenders and banks now have on obtaining jumbo loans.”

While some buyers and investors say that there are housing deals to be had, homeowners and sellers argue that the market has put a strain on their investment.

“Most buyers are looking for a clearance sale,” said Ms. Callender.

Foreclosures and short sales have hit the luxury home market particularly hard. As a result, Ms. Callender said that appraisals aren’t being done properly and homes have become significantly undervalued.

Ms. Callender explains that foreclosures are usually a set price, but short sales are a bigger problem because sellers can pick any number for a sales price and wait to see how the market responds. Plus, short sale transactions can take anywhere from three to six months from the contract to the final offer.

“Home values today are all over the place and are not accurately assessed,” Ms. Callender said.

Tom Byrne, president of Chadsworth Homes Inc. and chairman of the Custom Builders Council of the Northern Virginia Building Industry Association, said that a new regulation requires lenders and banks to hire independent appraisers. Often, these appraisers may be from outside the region and are not familiar with the local market.

Mr. Byrne said that arguably houses that are being sold through foreclosure should not be considered as part of the comparative review in an appraisal, as these houses are not sold at an arm’s length transaction. However, if there aren’t other comparables in the area, appraisers may include foreclosures (or short sales) and should adjust the value accordingly. If an appraisal comes in low, Mr. Byrne says it drives down sales prices or buyers may have to come up with additional cash to close the deal.

It’s also just taking a long time to get loans closed these days, even when buyers have excellent credit.

“The lending system, as a result of the post-subprime mess, is causing sales of luxury homes to take six months or longer than it used to,” said Mr. Byrne.

A report released in August by the National Association of Realtors noted that foreclosures and short sales accounted for 36 percent of transactions in the second quarter. These distressed sales continue to weigh down median home prices because they are often sold at a 15 to 20 percent discount. Experts say that this discount significantly impacts the entire average.

According to Ms. Callender, there is a home in the exclusive community of Woodmore South in Bowie that would have sold for about $850,000 several years ago but is now priced at $650,000. She received a call from a short sale speculator offering $389,000 for the home.

Because of “bargain hunters,” nondistressed homeowners are unable to sell their luxury homes for their real value. Furthermore, Ms. Callender has noticed a misuse of the short sale process as nondistressed sellers are using it to sell their homes and move up to a larger home (that is now reduced in price).

In Prince George’s County, Ms. Coffey says there are about 354 homes priced at more than $500,000 and 52 that are more than $1,000,000. She said some of these homes are new construction with builders offering incentives to buyers, making it hard for resales to compete.

To entice buyers, builders are dropping prices on new homes and offering options and upgrades (such as free finished basements), conducting raffles and offering prizes for exotic vacations, and hosting open house barbecues. However, Ms. Callender warns buyers about price reductions in subdivisions because sometimes the seemingly discounted homes are actually smaller.

Custom homebuilders like Mr. Byrne said that while he believes there will always be a market for custom luxury homes, the post-subprime market has created several challenges.

“Many people who can afford a quality-built custom home are enticed by the lure of getting something for nothing,” Mr. Byrne said.

He explains that the market is fooling people into expecting a custom home for the cost of a tract home or less. Custom homes are competing with builders’ existing inventory or the resale market, when there really is no comparison to the level of quality and personalization that buyers get with a luxury custom home.

“Many of these houses that were built and are still on the market are overpriced, ugly and cheaply built. As a result, many of the builders are now out of business and these houses are being sold by the banks,” said Mr. Byrne.

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