Sales of homes that cost millions rose dramatically in major U.S. cities last year. Wealthy Americans prospering from a rebound on Wall Street are taking advantage of low interest rates on jumbo loans and falling home prices to land unprecedented bargains. Meanwhile, home sales overall are stalling, and analysts expect home prices to decline another 25 percent as a flood of foreclosures hits the housing market in the months ahead.
Stock market wealth fuels luxury real estate
Million-dollar home sales increased last year in all 20 major metropolitan areas monitored by DataQuick, a real estate analytics firm. After four straight years of decline, high-end home sales increased 18.6 percent. Wealthy people are feeling more financially secure as stock values have nearly doubled since March 2009. The luxury home market in San Jose, Calif., led the way in 2010 with a 27.4 percent increase in sales of homes priced more than $1 million. In New York, Wall Street bonuses drove a 25 percent increase in high-end home sales. In Washington, D.C., richly compensated government workers boosted luxury real estate sales 20 percent. In contrast, Phoenix, one of the most depressed real estate markets in the nation, saw just a 0.4 percent increase in luxury homes.
Jumbo mortgage rates plummet
The boost in luxury home sales is also being driven by a dramatic decrease in jumbo mortgage rates. Buying a $1 million home requires a jumbo loan. A jumbo loan has a higher interest rate than a regular mortgage because it’s considered too risky to be backed by Fannie Mae or Freddie Mac. In 2009 jumbo mortgages had interest rates 1.8 percent higher on average than regular mortgages. In 2010, the difference narrowed to 0.6 percent. However, even though that decrease translates to about $780 a month savings on a million dollar jumbo loan, many luxury home buyers pay cash. Last year 29.4 percent of buyers who bought homes that cost more than $1 million paid cash, according to DataQuick. For home sales valued at more than $5 million, 62.2 percent of buyers paid in cash. For million-dollar homebuyers who got jumbo loans, the median down payment was 40.1 percent.
Outlook remains grim for housing market
Growth in luxury real estate sales is doing little to revive a moribund housing market that is down 80 percent from its peak in 2005. New home sales fell 11.2 percent from December to January. Analysts also predict that home prices may fall another 25 percent. Foreclosures accounted for 26 percent of U.S. homes sales in 2010, and that number is expected to increase. A majority of potential homebuyers are being advised to wait another year to get an even bigger discount. But there is some good news. According to the National Association of Realtors, an annualized rate of 5.36 million for existing home sales in January was higher than forecast. If the trend continues, existing home sales could increase 8 percent in 2011.