Wolf Richter: ‘Wealth Effect’ Kicks in – Luxury Homes Are Hot, Rest of Housing Market Gets Hosed

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.

Home sales have been declining since last fall and in some cases steeply, with memories of bidding wars early last year triggering wistful sighs. The sales decline continued into the summer, and indications are that they’re dragging into September as well. But the median sale price continued to rise, if at a slower rate, and in many areas has moved out of reach for the median-income household.

Unsold inventories are rising. This has hit new homes the hardest. Otherwise exuberant homebuilders – they’re licking their chops about the sky-high asking prices – are complaining about foot traffic just as inventories have reached 6 months’ supply [Drowning in Unsold New Homes?].

Home sellers have gotten nervous, and 24% of them across the country lowered their listing prices in July to entice potential buyers to show up. And home flippers are finding their business model – buy low and sell high – under pressure [Home-Flipping Collapses in San Francisco, Losses Spread ].

But hey – no worries at the upper end. In the luxury housing market, it has always been a long drawn-out process to sell a home. There aren’t that many people around with the means to buy these properties, and sellers usually aren’t that desperate and don’t have to sell and thus can hang on to their homes for years. In that rarefied air, the housing market is booming, and the time it takes for a luxury home to sell is dropping.

The median age of inventory of homes above $1 million has dropped for all price categories from July 2012 to July 2014, The Wall Street Journal reported. In the $1 million to $1.9 million range, the median age of inventory dropped from 132 days to 98 days over the two-year period. Further up, in the $7 million to $7.9 million range, it dropped from 179 days to 142 days. In the $25 million to $29.9 million range, it dropped from 222 days to 180 days. They’re practically selling like hotcakes. At the very top, at $30 million and above, the median age of inventory is now down to just 139 days.

The change has been dramatic in Vail, Colo., where it was common for homes above $15 million to linger on the market for more than two years. Now they’re “trading in months, not years, and sometimes in weeks,” said Tye Stockton, an agent with Ascent Sotheby’s International Realty, pointing to a home listed at $19.9 million that went into contract in under 45 days. Like many, Mr. Stockton attributed the change to the uptick in the stock market as well as the improving economy. Not only are these houses moving fast; many are commanding near-record prices a square foot, he added.

These folks no longer dilly-dally around:

In Greenwich, Conn., Tamar Lurie with Coldwell Banker is expecting about 20 sales above $10 million this year, which is roughly twice the number sold last year. In July, she was one of two agents who sold the Armonk, N.Y., home of Ron Howard for $27.5 million. Ms. Lurie said they had an accepted offer in the first week, and the house sold at asking price in less than three months.

The luxury market is sizzling across the country, even as the rest of the housing market is teetering. The foundation of the housing market, first-time buyers, is crumbling. The primary force behind the soaring prices since late 2011 have been private equity firms and other big investors. They plowed the endless and nearly free money from Wall Street into key housing markets, ratcheting up prices with every wave. Now their business model has tripped over the impact of soaring prices on renting those homes to the strung-out American middle class. And they’re backing off.

But the luxury market has been fired up by the stock market (and other asset bubbles), as real estate agents pointed out. The Fed should be proud. In the luxury market, monetary policy truly morphed into the “wealth effect” that then has performed miracles.

In 2010, Fed Chairman Ben Bernanke explained the wealth effect in an editorial. “Strong and creative measures” is what he called QE and ZIRP. They would drive up stock prices, he said. “And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.” Out of Greenspan’s dog-eared textbook.

And this is precisely what has happened, after nearly six years of ZIRP and $3.5 trillion of QE. But it didn’t happen in the broader economy. It was concentrated on a tiny sliver at the very top. The wealthier the people, the more they benefited. A working stiff with $40,000 in his retirement fund might have made $60,000 after fees since the market bottom – if he didn’t sell at the bottom. A billionaire might have made a couple of billion dollars.

But most Americans don’t own stocks and didn’t benefit at all. Savers were eviscerated. People living off well-planned, prudent fixed-income strategies suddenly found their future go up into the wealth effect destined for others – who’re now splurging on luxury homes.

But at the rest of the housing market, where homes have once again moved out of reach for many Americans, something has to give. And it’s not going to be the maxed-out middle class. Read…. But Who the Heck Is Going to Buy all these ‘Overpriced’ Homes?

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  1. ArkansasAngie

    Personally I would have preferred no bailouts and had the elites pay the price for poor decision making — here’s looking at you AIG (Warren B).

    But … but … people would have suffered.

    Well … people are suffering now.

    I would prefer a different set of pickers of winners and losers … like “the market”. Oh wait … there is no market.

    1. pretzelattack

      everything seems more and more rigged. it burns me up when i hear ordinary middle class people regurgitating
      propaganda about the american dream, and talking about all those lazy slacking poor folks, while admiring he rich.

      1. Jack King

        Actually for a number of years, it was a buyer’s paradise for first time buyers. Prices where low, and interest rates were low. But things never stay the same. Strike when the iron is hot.

  2. Aaron Layman

    Our local real estate board was celebrating the record high in home prices for any August on record, and the “strong” condition of the market, of course downplaying the fact that sales rose by a paltry 1.1 percent year-over-year. In two of the more popular communities I track, sales were actually DOWN 32 percent year-over-year. The reason is simple…AFFORDABILITY.
    While apologists were busy celebrating stagnant sales driven by juiced luxury home market, they neglected to mention the fact that sales were struggling in a downward interest rate environment. The reason for the stagnating sales isn’t a lack of inventory; It’s a lack of affordability. I get a good chuckle seeing crap tract homes which were lucky to sell for $80 per square foot two years ago now selling for north of $100 per square foot.
    If you ask our local newspaper everything in Houston is still affordable (at least compared to San Francisco LOL!), but the folks running the real estate desk at the paper seem to be severely mathematically challenged. Their regurgitated numbers all look great. Just don’t ask them to print the methodology behind them.


    1. Larry

      In my suburban enclave near Boston I am seeing inventory sit on the market for a long time, probably because it’s overpriced a bit. The houses that seem to be selling at a good clip are in the 500-600 (and up) range of homes. My county register of deeds notes this in his report on home sales in the county, with a median price of ~$600k and basically flat sales year over year. The median price of home sales is up, which suggests an improving market apparently.


  3. Christopher D. Rogers

    I know folks on here are US-centric, but the story has global implications. Here in Hong Kong home prices are still defying gravity and selling at unsustainable prices based on actual earnings and affordability, and as has been pointed out, that with interest rates at record lows.

    It would seem, excluding homes in the super league, that the great housing bubble unleashed by QE is about to go pop, things are not looking bright on Mainland China and their banks are now being openly attacked by the Communist party for effectively facilitating money laundering, given the RMB is still not a fully convertible currency, which will impact prices in HK, Australia and the West coast of Canada.

    Not too sure what at the end of the day will cause the great global housing bubble to deflate, but when it does finally go pop expect a 30-40% correction, which is not unprecedented here in Hong Kong. I’d actually say it’s really down to the Fed now, QE has failed to increase demand, but succeeded in artificially boosting impaired balance sheets of the global major banks in line with Basel III requirements. However, given the average Joe cannot afford to buy with low interest rates and current prices, whats to happen when interest rates begin moving north again, which the BoE at least has already indicated is its next move.

    So its all eyes on Yellen, given the Euro Zone now seems in terminal decline for the foreseeable future as their is zero demand, apart from the largesse of those wealthy folks who have benefited greatly since the GFC, most of whom don’t purchase cheap Chinese goods.

    1. Jim Haygood

      Hong Kong’s real economy is tied to China, while its monetary policy is imported from the U.S. via the currency peg. During the past several years while Chinese growth was strong, ZIRP was a wildly inappropriate policy setting for Hong Kong, serving to produce a monster property bubble.

      Hard to imagine, but if Chinese growth should falter while the U.S. chugs on, the Fed’s policy rate could end up being too tight for Hong Kong.

  4. Jim Haygood

    ‘Most Americans don’t own stocks and didn’t benefit at all.’

    Maybe not directly. But most working adults own stocks indirectly through a pension plan. Tragically, the biggest pension scheme of all, Social Security, owns no equities. Its ‘prudent fixed income strategy’ (circa 1935) is getting eaten alive by ZIRP.

    1. ptup

      “But most working adults own stocks indirectly through a pension plan.”

      Maybe twenty years ago, but, not now. Most working adults have no pension. And, unfortunately, most working adults have very little saved in “personal” pension plans (IRA, 401k, savings) because they had no plan available to them, or were not able or chose not to save.

      “Tragically, the biggest pension scheme of all, Social Security, owns no equities. Its ‘prudent fixed income strategy’ (circa 1935) is getting eaten alive by ZIRP.”

      Well, thank god. I know many a finance lobbyist will spend the rest of their days pushing to privatize the trillions of SS money, and they may very well succeed, but, for now, the money is safe in the what is still the world’s safe haven for investments. Imagine your SS money churning in hedge funds, and making many even more obscenely rich than they are today. Yeah, that would be peachy.
      SS is fine anyway. Don’t fall for the meme that it’s going bankrupt. Sure, the Boomer bulge will stress it a bit, but, what’s not being talked about are the millions and millions of Boomers who will delay taking payments because they are working until the end, because they have to. Look at the employment numbers of 55+ set as they slowly rise in relation to the rest of America. That will take a ton of pressure off of SS for a while.

      1. John Zelnicker

        IIRC, the average account balance in 401(k) plans is somewhere between $20,000 and $40,000 for those lucky enough to have one. And, the first thing almost everyone does when they lose their job is take that money out to live on.

    2. Doug Terpstra

      … as planned. “Tragically … Social Security owns no equities.” Yup, high time we just turn it over to the savvy Jamie Dimon to manage; then AIG could insure it. What could go wrong?

    3. wbgonne

      It’s a “tragedy” that Social Security hasn’t been privatized? Good grief. Have you been asleep for the last 40 years and missed the plutocrats’ ongoing War on the Middle Class? Have you not noticed that Wall Street provides the shock troops in that war? The problem for pensioners right now is ZIRP, not Social Security. So end ZIRP.

      The American Middle Class is hanging by a thread. If Wall Street gets its hands on Social Security that’s it for the social safety net and the Middle Class. I can’t even believe you are suggesting this.

    4. Chris

      Social security doesn’t own anything in terms of assets. It’s backed by the promises of Congress and politicians in general to fund future benefits with either treasury debt or payroll tax revenues. There is nothing in the “trust fund” but IOU’s. While some claim that these are just as good as treasuries, in truth they’re just an accounting fiction.

      That’s not to say it is going to “go broke” anytime soon. That’s another fiction.

    5. Banger

      Well, maybe–I don’t really disagree. Had SS money been invested in a Wall Street pension fund returns may have been much better. But the devil would be in the details–can you say more about that? Because many pension funds have been looted by corrupt officials and criminals on Wall Street.

      For me, of course, the problem is political–to give money to my sworn enemies (Wall Street) who I believe are a destructive force in society to play with makes me nervous. I believe modern capitalism has been a largley positive force in society, on balance, but it has outlived its usefulness and has now become just a way to maintain privilege for the new aristocracy–so any shot-in-the-arm for that system I would have to oppose.

    6. RUKidding

      Yeah, right, like the stocks owned by CalPers, which saw a HUGE sucking loss in 2008 & from which CalPers is still frantically digging out from under. That’s not to mention, the criminal activities indulged in by CalPers mucky-mucks, which WASTED MY money in their schemes and crooked activities.

      Yeah: what a frickin’ GREAT idea it is to have Pension money invested in Wall ST bc it is so “safe,” and the investment managers are so honest, honorable, trustworthy and good fund managers.

      Of course, when the mucky mucks talk about how CalPers may have problems paying pensioners in the future, what we mainly hear are conservative screaming about how the lousy loser CalPers pensioners are ruining the system and expect something for nothing and should have never ever had a pension to begin with.

      You mean: like that?

      1. Jim Haygood

        ‘You mean: like that?’

        Yep, I sure do. Not only Calpers, but every public and private-sector pension plan (other than Soc Sec) holds equities. So does every sovereign wealth fund on the planet.

        Why? Because equities outperform fixed income.

        You’re welcome to disagree, but a ‘no equities’ stance is universally rejected by pension sponsors. Plan sponsors simply cannot afford the enormously larger contributions that would be required to fund a fixed-income-only plan.

        1. Lune

          Actually, Social Security does hold the equivalent of equities. It’s called the power of taxation. As Warren Buffett likes to put it, the U.S. Govt is a 33% profit partner of every business in America. Social Security will get more revenue as the economy expands, both from payroll taxes, and from general revenue that would be available to fund any shortfall. Would it get more by holding equities? Given the size of the S.S. fund, they won’t grow any faster than GDP, which is the same rate that tax revenue (absent changes in laws) grows at.

          If you believe that long-term investing in equities is not about capital appreciation but about owning a share of future profit streams, then there’s no reason for Social Security to funnel its money through Wall St, allowing it to skim its usual fees, when it can accomplish the same thing much more efficiently through taxation. If you believe S.S. is not getting enough revenue, then we should raise the taxes that support it, rather than go through the equity market to accomplish the same thing (taking a share of corporate profits to support S.S. payouts).

          So why do pension funds and sovereign wealth funds invest in equities? I’d posit for the same reason: to get access to economic growth outside the region of their taxing authority. If you’ll notice most sovereign wealth funds are from small countries looking to diversify their government revenue beyond their own local industry. You can think of state and municipal pension plans in the same way. If the U.S. government at some point wishes for S.S. to be funded partially by economic revenue outside the U.S., then a good way to do that would be to possibly invest in foreign securities. But as long as both the revenue and costs of S.S. are tied to domestic factors, there’s no reason to do so.

        2. bruno marr

          Yes, but… prudently managed public pensions don’t go “crazy” with hedge funds. CalPers is an interesting blend of massive size, mediocre management, and clear corruption. When the state doesn’t adequately fund their portion (usually a match with employee) then CalPers overseers probably sought better gains through higher risk (at the urging of Wall Street, of course). This all seems part of “the best laid plans of mice and men. . .” .

    7. jrs

      Oddly I’ve invested what money I’ve saved in bonds and stocks (and cash) because I can’t afford a house in California. So little angers me more than hearing houses are for ordinary people (a house is easily a $3000 a month mortgage here) and stocks are purely for the wealthy (when you can get in a mutual fund for $100 a month or put in your 401k for 1% of your income if your workplace has one). 1st world problems yes (and not much of the 1st world at this point).

  5. John Zelnicker

    Social Security was designed as a pay-as-you-go scheme. Then Reagan raised the retirement age and the contribution rate in 1981 to ‘restore it to fiscal responsibility’. (The then-current projections were that the Trust Fund would run out of money by the end of 1982.) The actual purpose was to create a surplus in the Social Security Trust Fund that could be used to hide the size of the federal budget deficit under the consolidated budget rules.

  6. Banger

    Of course, ultimately, the scenario points to grand feudal manors–but having said that, I don’t think that home prices will plummet in the USA unless credit dries up. But the age of homes being the prime investment vehicle is over. People want high-end homes with the latest appliances and “look” so houses that have amenities even if they are modest in size will have a leg up in the RE market. Houses need to feel upscale because that is what people want more than anything else since the home, like the car, represents status and status is the chief driver, at this time in history, of consumerism.

  7. mb

    In Silicon Valley, there are practically no homes lower than one million – and they are NOT luxury. In most cases, they’re dumps. There’s the wealth effect for you.

    1. Ed S.

      To amplify MB’s point — I don’t know what part of the Bay Area that Wolf is looking at.

      Put simply — in Silicon Valley ( loosely from San Jose to San Francisco and on the “peninsula” of land that runs between these two cities — available house inventory is effectively zero. Consider San Mateo County (which runs from bay (east) to coast (west) and from the southern border of San Francisco to Menlo Park / Palo Alto). That’s the Northern half of SV (includes Facebook; Google is 3 miles south of SM county in Santa Clara):

      Population – 750,000 (2013)
      Housing units – 272,000 (2010)
      Non – multi family Housing Units – 182,000 (2010)
      (from US Census – http://quickfacts.census.gov/qfd/states/06/06081.html)

      Number of houses currently for sale (per Redfin) – 520 (1/4 of 1%)

      Yes, flipping is dying (because there aren’t any “bargains” left) and yes there are price reductions from time to time (even in a market with effectively NO inventory, a house can be overpriced. As in listing at double the price paid 12 months ago). Condo apartments (and rentals) + townhouses are springing up like mushrooms after a spring rain.

      But new construction SFR in San Mateo county? Effectively zero. So no way to increase the number of SFRs. (and, for what it’s worth — even if you can find a lot to build on, the process is time consuming and very expensive).

      Now the Bay Area is a big place (the 9 county area has 7 million people – more than Scotland) and I’m sure there are areas that are not doing well. But SF proper and SV — more money, more people, few properties for sale and no available land for SFR construction = big prices.

  8. mb

    Oh, and I forgot. Homes here are put up for sale in China or other countries, bought with a suitcase of cash, a quick facelift for the home and flipped for a quick profit. Often, occupied by a new Chinese or other Asian family newly migrating. Not occupied by a local family. Ah, love Capitalism.

  9. Fair Economist

    The wealthy have more money than ever before, but with interest rates still near record lows and PE ratios still well above historical norms, stocks and bonds don’t look like good investments. I’m not surprised at all that they’re investing in real estate. To the extent that it produces luxury home building, it will produce consumption by the rich and that would be a good thing for the economy. I doubt there will be enough for a noticeable macroeconomic effect.

  10. RUKidding

    Anecdotal observations.

    I live part time in Sacramento. I feel that properties are still over priced, but that’s probably a spill-over effect from being close to the San Franci$co Bay Area. We get investors buying here bc there’s nothing affordable over there. Plus I believe it was BlackRock who came here after 2008 and scooped up loads of homes at the low end of the market (I have friends in RE who claimed, back then, that it was nearly impossible to buy Foreclosures on the Court house steps due to some shenanigans) & turned them into rentals. I know Yves or Lambert has written about this practice, and it’s been reported in the Sacramento Bee. I’m not sure if BlackRock is trying to sell these off or continues to “own” them & rent out.

    That drove up the prices of homes in Sacramento to much cheering, plus then the vulture developers began pushing to build build build more new homes. Idiotic Sac County Board of Supes have approved some really stupid projects, esp given our water problems. But hey: they got their payola, so it’s good, right?

    Friends of mine have had some problems selling their homes in Sacramento, though. If they’re not fixed up just right, then the prices do begin to drop. I think the market has flattened out somewhat, although there are new developments in process. Don’t know what a glut of new homes will do to the prices here. Sacramento has always been more of blue collar/working class town, and since the 2008 crash, it’s noticeable that there’s less money available for citizens to spend.

    In San Diego, where I live pt, I see prices have gone up, esp in some very desirable parts of town. Interestingly enough, though, some high end luxury homes with ocean views (the ultimate of the ultimates in San Diego – and a cause for a huge price jump) have had to drop their prices recently two and three times. So… I dunno what that signifies.

    A friend recently put her small home (around 1700 sq ft) for sale in Reno. Apparently, it had just been listed and there were no less than 5 offers. This one is still in process. At least in Reno, home prices have gone up, and there is some action happening. With the new Tesla battery plant going in, there may be an increase in home prices there.

    Nevada has been better about water conservation than CA.

    1. armchair

      I have a friend renting a house in the Claremont part of San Diego. Their landlord went big, buying 4 houses in that neighborhood at the peak of easy money. Now they are grateful to get half the mortgage payment in rent. The house is still underwater. The landlord will probably go broke at some point.

  11. Jill

    In Toledo, I’m seeing the same signs of catastrophic economic collapse that I saw in 2007. Part of those signs are in real estate.

    Just in the past month or two and amazing number of homes have been put on the market. These homes are in all areas, in all price ranges. Poverty here is very high and people do not have money for food. This includes the so called middle class. This is the same thing I saw before 2008. I believe we are very near to another collapse as bad as 2008.

    1. ambrit

      I don’t know about the big estate angle, but municipalities everywhere have been stealthily tearing down “eyesores” to “improve” their towns ambiance. I’ve seen very few “official” groups run home renovation and low cost mortgage or ‘rent to own’ schemes. Squatters rights movements might do more social justice work than anyone else. See:

  12. Sam Adams

    It is the cannibal Economy working its magic in the death dance. Until there is a real economy, everybody will eat on someone else.

  13. impermanence

    The true magic of this system has always been in the convincing of the common-folk that the answer to their difficulties was in trading their shackles for whips, and pretty much everybody bought into the idea. Amazing.

  14. Pepsi

    I wonder if it would be possible to lobby for new construction codes, and somehow regulate away the tract home with a lifespan of 20 years. So many people just don’t know better, or don’t have a choice, and their lifetime of debt goes to pay for a structure that can barely be classified as such.

    We all know someone whose great grandfather built a house 100 years ago that’s still strong and has needed no significant repairs. It could be part of the permaculture movement, the permastructure movement.

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