Dan's Papers -February 13, 2009 - Estate of Mind - High End Market Wanes; Money Waits

The "high end" real estate market has always been a different animal. Homes over $10 million were typically bought and sold by the people who were, to quote the old phrase, "recession proof." However times have changed forever. A senior V.P. at Merrill Lynch calls the current state of affairs, "high end postponement of consumption." He believes many of the affluent are afraid to take any risks now, considering their net worth is down as much as 30% (which is, by the way, about the same as the decline of the S&P on Wall Street). He also mentioned the decimation of the "imposters" - those who used leverage to appear high end but have now been exposed financially. He said, "They are the panic sellers, they just don't have the resources to carry the loads of leveraged cars, homes, the whole life style."

But the Merrill exec also predicted the end result will still be "pent up consumption," meaning that, when the dust settles, confidence will return and people will address their neglected needs by buying new shoes, new cars, and eventually, new homes for the kids or nicer digs for themselves.

That may be in the future, but the fact is that right now, compared to 2004, the sales volume of homes over $10 million has dropped more drastically than any other price point in every town on the East End. A reason for the drop in activity in the high end market may be the availability of "jumbo" mortgages." Greg McBride, senior financial analyst at Bankrate.com, reportedly said "More money down is the big reason people aren't taking [jumbo mortgages] out ... It takes good credit but you need 30% down or more, and even those people are paying an interest rate of more than 7%."

Potential buyers hear about the lowest rates in years - some as low as 4.5% - but where are they? Only people with nearly perfect if not 100% perfect credit scores can apply and expect any sort of positive results. Not to mention, those rates apply to lower sums, not jumbos.

Recently, the Suffolk District Attorney has begun to investigate a possible mortgage fraud, stemming from a Westhampton firm where records for the last 30 years were seized. These reports don't exactly instill consumer confidence. Reacting to this comment, the Merrill Lynch Senior V.P. said, "That's true, but it's about more than confidence. It's about not waiting to blow the money many were given and, quite frankly, have no clue on how to replace. They don't know how to recreate the $90 million that their grandfather left them. Some have lost trust in people like me because they think I gave them bad advice, not seeing the market's downturn ... Who saw this mess coming?"

Martin Mayer, the Brookings Institute Scholar, actually did. In his recent talk at the Shelter Island Library, he said, "The bubble had to burst on so many levels. Quite frankly too many people had no idea what they were doing." The marketing of "toxic assets," the term for bad mortgages on homes that are higher than what the home is worth, are being compounded with the value of the home falling and no way for the owner to sell it. That problem is still growing.

But, strangely, there is still one sector that is unaffected by the downturn: custom work on existing mega-estates, and the creation of new ones. Bulgin and Associates, a firm serving the top end building needs for the last 25 years, has not seen a downturn yet, perhaps due to the three-year time lag on their continuing 15 projects. However new long range planning is a touch softer.

A conclusion would have to be that when the various economic markets stabilize, and when a system to market the "toxic assets" and value them comes into being, stability will occur. Then, activity on all housing will pick up, slowly at first. Perhaps the first properties to move will be in the high end housing sector because, in the words of F. Scott Fitzgerald, "The rich are different." What he didn't say was, "and they still have lots of serious money."