There is not one design, style or size that embodies a luxury home. It could be a sprawling 15,000-square-foot French manor set on several rolling acres, or it could be a 4,000-square-foot contemporary home nestled into the side of a mountain. Although it's difficult to quantify exactly what luxury means, most buyers think they know it when they see it.
Across the United States, sales of luxury homes have been hitting records. The number of California homes selling for $2 million or more, for example, reached an all-time high in 2013, as the state rebounded from the foreclosure crisis. The U.S. is not the only place seeing bitg sales of luxury homes. Vancouver, Canada's priciest real estate market, saw a record 36% increase in 2013 over the previous year on sales of homes priced over $2 million.
Prices for luxury real estate have also seen significant increases over the last couple of years. According to Knight Frank's Prime Global Cities Index, which tracks luxury real estate in 30 metropolitan markets around the world, the hottest luxury market now is Jakarta, which saw price increases of nearly 38% at the end of 2013 over the previous year. Knight Frank defines luxury real estate as homes that were sold in the top five percentile in terms of value. Other double-digit price increases in the last quarter of 2013 over the same quarter 2012 include Dublin (17.5%), Beijing (17.1%), Dubai (17%), Los Angeles (14%), Tel Aviv (12.7%), Bangkok (12.3%), San Francisco (10.4%) and New York (10.4%).
Why the Growth?
It may seem incongruous that luxury markets are heating up, given that much of the world is still recovering from the 2008 financial crisis. Like the financial markets, the real estate market operates under the law of supply and demand. And by nature, there are a limited number of luxury homes for sale at any given time in a particular market. That limited inventory alone can help drive up prices as multiple buyers bid on a single luxury property.
Strong Job Market
In many metropolitan markets, such as Denver, low unemployment rates coupled with well-paying jobs have fueled the luxury real estate market. Chris Mygatt, president of Coldwell Banker Residential Brokerage in Colorado, said, "We have never seen this kind of frenzy in luxury home sales before. The strongest single market segment for 2013 was clearly the luxury home market. If you include the sales of properties priced at over $500,000 - the top 10% of the market - we saw an increase of 44% year over year."
In the U.S., international buyers represent a growing percentage of the real estate market, including the luxury market. From April 2012 - March 2013, international transactions were at $68.2 billion, which made up more than 6% of total U.S. existing home sales (in dollars), and more than 4% of transactions, according to the National Association of Realtors (NAR); 2013 Profile of International Buyers. Florida, California, Texas and Arizona were the leading destinations during that period, with the majority of international buyers coming from Canada, China, India, Mexico and the U.K. These numbers represent a small decrease from 2012's $82.5 billion in sales to international buyers, but NAR believes this is related to the slow growth in some major European economies and that the issue "should dissipate over time."
The publication also cites that international buyers typically purchase higher-priced properties compared to domestic clients: international buyers spent an average of $354,000 versus $228,000 for domestic purchases. Due in part to the tight U.S. credit standards facing foreign buyers, the majority of international purchases are all-cash deals (63%). This can put other buyers who need financing at a disadvantage, since all-cash deals tend to move faster through the process.
U.S. Relatively Inexpensive
The U.S. is home to only one of the top 10 most expensive cities in the world, making the U.S. a relatively inexpensive and attractive destination, both in terms of cost of living and housing. According to Forbes Magazine, the top 10 most expensive cities in the world (as of March 2013) are:
- Hong Kong, China
- Tokyo, Japan
- London, UK
- Paris, France
- Moscow, Russia
- New York, NY
- Shanghai, China
- Mumbai, India
- Sydney, Australia
Buying a Luxury Home
According to the 2013 Profile of Home Buyers and Sellers published by the National Association of Realtors, nine out of 10 buyers used the Internet at some point when looking for a home, and 43% of recent buyers first found the home they purchased online.
While the vast majority of homebuyers rely on the Internet at some point during their home searches, luxury homebuyers can be at a disadvantage when it comes to finding properties online. Many high-end properties aren't listed on MLS or search engines. And, in order to protect their privacy, many sellers avoid putting information and photos of the property on the internet.
Find a Qualified Real Estate Agent
If you are in the market for a luxury home, a qualified real estate agent who knows the luxury market may be your best bet for finding properties that are for sale but that are not necessarily easy to find because of privacy concerns. An agent familiar with the luxury market may have inside information about listings before they hit the open market. And, an experienced agent will be able to help you determine the market value of a luxury property. Most residential real estate is valued using comparables - similar properties in the area that have recently sold. Valuing luxury properties can be a challenge since often there are no similar properties in the area.
The loan process for luxury homes typically takes longer than for smaller mortgages. Even if your financials are in good order, it may take 45 to 60 days to secure a loan. Since it can take extra time, and because the seller of a luxury home is often interested in showing only to qualified buyers, many real estate agents recommend having your mortgage broker, loan officer or personal banker obtain your financing approval early on in the process.
As with any real estate purchase, it is important to take the time to properly inspect a luxury home prior to purchase. In many cases, luxury homes are larger and have amenities that may require specialized home inspectors, such as:
- Pools and spas
- Fountains and ponds
- Lawn irrigation systems
- Exterior fireplaces
- Automatic screen and awning systems
- Central vacuum systems
- Heated floors/driveways
- Sophisticated security/surveillance systems
- Landscape lighting
The Bottom Line
The luxury home market has experienced record growth in the last several years. Much of the growth in the U.S. and Canada is the result of international buyers who want to take advantage of favorable exchange rates, are relocating for work, are using real estate as an investment, or who may be affluent parents purchasing a home or condo for their children who attend North American universities.