Monday, June 18, 2007

Luxury Home Sales are still on a Tear

By Mark J. Donovan

Everywhere you read the housing market has cooled. However there is one exception, the luxury home market. The wealthiest Americans are still buying up luxury homes and vacation homes. Some reports suggest that the wealthiest 10% of the nation’s households could account for nearly half the home sales this year.

So what are the reasons for this anomaly, and are the wealthy setting themselves up for a major correction in their own ball field?

First, wealthier households, with incomes greater than $250K per year and high net assets, are typically immune to higher mortgage interest rates, inflation, and other household cost increases such as gasoline and grocery products.

Second, wealthier households in general have bigger appetites than the average household. Historically their diet has included big-ticket items such as homes, automobiles, and boats.

Luxury homebuilders have been more than happy to help fuel the demand, and I might add, increase their prices. At some point, however, even the rich will begin to feel the pinch, or at least become smart enough to know when they are not getting good value. When that point comes, the luxury housing market will probably have at least a soft landing. Until that point comes, however, this last bastion in the residential home market will probably continue to flourish.