Get ready for sticker shock as you open the mail and get your tax bill. …
The Hamptons have increased inventory by 82% to the highest level in 12 years. At the same time sales fell 35% last quarter to their lowest since 2009 (Bloomberg). In Aspen, another ultra-high-end market, sales are down 27% on single family homes from 1.2B in 17 to 874m in 18. Is the sky falling! What does this mean? Why should you care what is happening in Aspen and the Hamptons? Are we in for another wild real estate cycle? Can this indicate pain to come for the rest of the economy?
Why watch high end markets as a real estate indicator?
Living in Colorado, I watch the ski markets like a hawk, whatever happens at the high end eventually happens elsewhere. If we look at the last cycle, we saw that in more expensive markets the real estate pullback started well before the rest of the country. Aspen is the epitome of the ultra-luxury market with an average home price of 7m which is why it is important to take note of the market trends occurring here. The latest market data show Aspen down 27% from last year in dollar volume closing 319m less than in 2017
If we study the last cycle, the ultra-wealthy saw the writing on the wall of the imminent downturn before general America and began taking steps to protect themselves months before the rest of general America. Many ultra high net worth individuals are high level execs in various businesses that drive the economy and therefore have access to information that the general public does not. For example, a C-level exec at a major multinational company can see global growth slowing with their sales projections before the general public. With what they are seeing in their businesses they are delaying the purchase in Aspen or the Hamptons and speaking loudly with their actions (or lack of) about their belief in the direction of the economy.
What is causing Aspen and the Hamptons to decline.
Unfortunately, nobody knows the true reason since the purchases in the high-end markets are purely discretionary (sorry to say nobody really “needs” a 7 million dollar house with leather on the walls). So in any cycle discretionary purchases are cut first.
Here are four factors I see influencing the sharp drop off in sales in these markets:
- Global uncertainty. The list is very long from China to Brexit to possible trade wars and everything in between
- Turbulence in financial markets: the stock market gyrations have been wild which doesn’t give anyone the warm and fuzzy feeling that is heavily invested in the market.
- Threat of the recession: I think this is the biggest driver of the pullback on the high end. Many high-end buyers only see downside risk in the near term as the current cycle begins to falter
What does this mean for other markets?
What we have seen historically is that that as the ultra-wealthy pull back their spending (or lack thereof) it will ultimately trickle down through the rest of the economy. For example, if buyers are pulling back from the Aspen market, are they also delaying other discretionary purchases (cars, boats, etc…). We are already seeing this as Vail resorts announced in their quarterly earnings that “destination visitation” was down which means high net worth families are already pulling back on expensive trips like a ski vacation.
The nosedive in Aspen and other high-end markets is invariably a precursor of things to come for the general economy. The only question is when this will fully “trickle” through the rest of the economy and impact markets throughout the country.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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