Why Luxury Properties Aren't Immune to the Real Estate Market Downturn

Bel Air’s Chateau d’Or, once the home of THR founder Billy Wilkerson, is on the market for $39.9 million through Sally Forster Jones at Coldwell Banker Previews International.

The factors that continue to hamper the overall market recovery -- unemployment, recession and financial restraints -- while driving many of us to drink, are a boon to those with enough money to drop $5 million.

From Hancock Park to Malibu, sales in the $5 million-plus range are up 15% year-over-year, according to Joyce Flaherty, a top seller for Coldwell Banker who tracks Westside sales. Buyers in that rarefied price range are having a field day scooping up properties that used to be out of reach. Price declines, originally confined to the bottom of the market, have now migrated upward.

[pullquote]

"A $10 million house in the bubble days is now a $5 million house," she explains. "Prices were outrageously inflated, and now they're plummeting. After unsuccessfully shopping their property for years, sellers have been forced to get realistic."

Overall, Southern California home prices have declined 43% since the 2007 peak, according to DataQuick, a San Diego real estate research firm. Like Last Call by Neiman Marcus, the slashing of prices practicallyjump off the page: A $30 million Bel Air property was marked down to $21.9 million before eventually closing escrow at $19.5 million in January. Paramount chairman and CEO Brad Grey managed to unload his $29 million estate for $21.5 million in June. Meanwhile, the William Randolph Hearst estate, a more than 50,000-square-foot mansion sitting on 3.7 flat acres on a hilltop above the Beverly Hills Hotel, is back on the market for a comparatively paltry $95 million. Three years ago, the compound was listed at $165 million.

These are hefty price tags to be sure, but they're a bargain compared with the going rates in 2007. Buyers are scrambling to take advantage of the price reductions -- and sellers who insist on sticking with their original asking prices find their homes stagnating so long that cobwebs form on the listing agreement. "It's a price-driven market for sure," says Jan Eric Horn, head of Coldwell Banker's architectural division. "If a house is priced slightly below market value it's perceived as a value and that attracts buyers."

While "smart sellers respond to the market," says Flaherty, there are still hold-outs: A rarefied slice of extremely wealthy sellers who are holding the line on today's deal making, price-slashing mentality. Even as their properties have lingered on the market, these sellers haven't budged on initial asking prices, some of which were set in the waning days of the housing bubble.

Suzanna Saperstein, ex-wife of Metro Networks founder David Saperstein, is still asking $125 million for "Fleur de Lys," a 41,000-square-foot French chateau-inspired mansion near Beverly Hills with gold-embossed leather wall coverings and a ballroom. The listing has been on the market since at least April 2007.

While many home sellers can be slow to adjust to the market, the very wealthy can be the slowest of all. "That stratum of the population isn't impervious to what's happening in the market, but they operate by their own set of dynamics," says Sam Khater, a senior economist at real estate research firm CoreLogic.

"Prestige home sales are a unique subcategory of the real estate market," adds John Walsh, president of DataQuick. "Buyers and sellers respond to a different set of motivations. In the multimillion-dollar prices ranges, decisions are largely discretionary and aren't as dependent upon jobs, prices and interest rates they way they are for most buyers." While traditional million-dollar markets are holding up relatively well, expensive markets that emerged four or five years ago are not. Million-dollar home sales in Riverside County, for instance, dropped 48.6% last year.

Still, it's a rule of thumb that the longer a list ing lingers, the less desirable it often seems to buyers. For some of these holdouts, brokers have masked the length of time "on market" by avoiding officially listing them or yanking them on and off multiple-listing services. Instead, properties are marketed on brokers' own websites, by word-of-mouth or through targeted mailings. Candy Spelling's "The Manor" in Holmby Hills officially hit the market in March 2009, for example, but was shown in 2008. Across the street, an 11,000-square-foot home on an acre, listed for $25 million in 2008, sold for $10.35 million in March.

[pagebreak]

Nearly all high-end homes are being picked up by locals, say the experts. According to Mohammed Hamza of Rodeo Realty in Woodland Hills, the exceptions are those rare $30 million-plus sales. Hamza represented an Indian couple in June's $50 million sale of a 2.2-acre French chateau estate in Bel Air. Originally listed at $85 million, the $50 million sale represents the largest broker-involved home transaction in Los Angeles history. "When you get into that stratosphere you're waiting for the Russian billionaire or the oil sheik," Hamza says. According to the Los Angeles Business Journal, the number of billionaires in Los Angeles rose to 31 this year, the first year-over-year increase since 2007.

Neighborhoods with the greatest amount of activity change from season to season without rhyme or reason. At the moment, sales in Hancock Park and Santa Monica are flat. Bel Air, with 14 closings this year, has nearly doubled the amount sold in 2009. Malibu, which had no sales earlier in the year, has picked up with five sales pending and one finalized since August. Brentwood has been relatively quiet with just seven closings in the $5 million-plus range compared with 18 last year. Pacific Palisades has seen a burst of sales (16 since January) thanks in part to the large parcels of land to be found. Meanwhile, Beverly Hills has enjoyed the greatest activity on the Westside with 32 closings. According to Flaherty, there would be even more sales, particularly in the flats from Santa Monica to Sunset boulevards, if there were greater inventory and more reasonable prices. "Sellers in the flats are asking $8 million and $9 million," she says. "At $5 million these homes would sell in a second."

Short sales, also known as pre-foreclosure sales when the owner is in default, are a rarity in this neck of the woods. "The higher the value of the property the less likelihood of a distress sale because the equity is greater than the loan," says Stephen Shapiro, president of Westside Agency, adding that anybody who buys in the $5 million-plus range will show up with a checkbook, not a subprime mortgage. "Short sales typically occur in lower-priced markets when the house is worth less than the loan and the mortgage lender agrees to accept an amount that's less than the full amount of the seller's debt. That rarely occurs in this bracket."

Spec homes (homes built without a buyer in place) are rare, too. "Speculators depend upon borrowed funds -- but banks aren't loaning," Shapiro says. "They'll loan if you can prove you don't need the money and you've got a lot of equity."

Having brokered some of the biggest deals in town with A-list clients, Shapiro has survived three or four downturns in his 35-year career but concedes that he has never seen anything on the global scale of the current meltdown. "The big question is: How long are we going to be where we are? Nobody's got a crystal ball and only time will tell. Every down cycle in the past has come back with a bang."

comments powered by Disqus