Return to Luxury?

The popular media was stunned when so many Super Bowl ads were pumping the idea of “buy luxury.” Aren’t we still in the Great Recession? Is it bad taste to sell the idea of $100,000 automobiles when 9.0% of the population is claiming to be unemployed?

Well, at least Audi found Kenny G a job. And it’s time to import (???) cars from Detroit (did the belligerent citizens in Windsor, Ontario suddenly invade and nobody told us?).

The reality is that the popular media loves to make stories out of trends that are obvious and/or sensational. So $3 million per 30 second spot (talk about obscene) creates an obvious segue for talking-head bloviating on the morality of luxury consumables. Of course, they never indulged in such shame-filled moralizing back in the day when those that could not responsibly afford such luxuries were buying them left and right in 2004 and 2005

Ben's fully-leveraged real estate ride, 2004 - 2006

(that spotlight would be on yours truly using a HELOC to buy an SUV like so many other stupid self-employed people were doing five and six years ago). The cable media bobblehead alternative is apparently a Despicable Me-style Pep Talk, where the evil villain Gru has to layoff all his robot minion. Feel your shame for wanting. Stay in the box. Rush to conclusions. Etc.

Or… look at the numbers. A close look at local real estate numbers shows a pattern that explains why luxury was getting pushed on Super Sunday. Those that can truly afford to buy luxury: have already started to buy luxury. It explains why earlier today I was talking to a luxury brand retailer about a likely Colorado expansion later this year. Those who have cash: they’re starting to spend it. Those who have cash usually don’t spend it stupidly (those who um, use a HELOC to buy an SUV, uh… they tend to spend it stupidly).

 

Proof: in 2010, there were 38 million dollar or larger MLS sales in the Pikes Peak MLS. This was up from 23 in 2009. The three-year average from 2007 to 2009 was only 45 units. Now in 2007 when big leverage was king, there were 71 sales over $1 million. Yet this is where it gets interesting and explains why Madison Avenue got luxury brands to plunk down for Super Bowl Ads: in 2007, 16 of these million dollar units were purchased with cash. That’s 22.5%. In 2010, 17 of the million dollar units were purchased with cash, including the five most expensive. That’s exactly double the rate of buyers using cash.

This trend was not restricted to the million dollar market. Despite six months of tax-credit stimulus pushing the lower-priced market, sales units under $300,000 were down by 8% in 2010 compared to 2009. It was the worst year for total sales in almost a decade. But average price was up almost 5%. Average price is merely the average value of everything that sold. That means while fewer properties sold in 2010, they were more expensive properties. Unit sales were off 8.4% under $300,000 in 2010. But from $300K to $500K, unit sales were up 11.4%. From $500K to a million, they were up 8.8%.

In 2007, there were 60 cash sales from $500,000 to $1 million; that was just under 10% of the total units sold in that time (608 units closed in 2007 from $500,000 to $1 million). In 2010, there were 50 cash sales from $500,000 to $1 million; that was just under 16% of the total units sold in that time (316 units closed in 2010 from $500,000 to $1 million). In 2007, buyers were more likely to use cash in the $600,000 to $800,000 price range (28 closed cash sales out of 268 or around 10%, compared to 11 closed sales out of 146 in 2010, or 7.5%). But everywhere else, the use of cash increased as a percentage of the marketplace. In 2007, one in ten deals from a half million to a million was cash; in 2010, that rate improved to one in six.

Not missed in this conversation is that the rate of sale of luxury properties is still half of the market peak for luxury (2007). But the refined story here is that in 2007, when leverage was king, there were far more consumers buying luxury items than the number that responsibly could afford such luxury. The reverse trend seems to be happening now: those that can responsibly afford such luxury are starting to buy. Just how artificial that 2007 “peak” really was is easy to identify based on the percentage using cash. Not only did 90% of the marketplace use money leverage to buy their homes in 2007, many bought with less than 20% down. Today, it’s nearly impossible to buy with less than 20% down. The specific numbers are not available on a local basis, but it is fair to theorize that more than 250 units of the 608 sales in 2007 used an interest-only, piggy-back second, 100% financing or balloon-product to buy their home, close to half the market; maybe 50 units did that in 2010, with most of those being VA Jumbos and professional loans tied to medical, legal and tax professionals.

These numbers further expose where change is happening in the market, and that this “change” is not strictly tied to the idea of the market’s “recovery”. It’s  change tied to consumer preferences. If a buyer is using cash to make a high-end purchase, does that change what they want in the home, especially compared to someone buying with a 2007-vintage 90/10/10? Doesn’t use of cash reflect a slower mobility rate? Doesn’t cash carry with it a higher sense of permanence and demand for lasting value? The 2007 sales year was off almost 15% in gross sales units from the year before, and had seven to eight months of inventory on the market most of the year, at one time hitting 7052 single family units for sale. Yet contrary to what was going on in the macro-market, luxury had a banner year in 2007. The average price in July of 2007 was over $270,000, the highest ever recorded. How could price go up if the probability of sale was going down? What was selling was irresponsible luxury, and all average price ever measures is the average of what sold.

What is unique today is that it is easier to call the purchase of higher end properties with cash a responsible acquisition. Buying with cash is not embracing money leverage: it’s enjoyment of the money. It’s not a hedge on the market: it’s the acquisition of a tangible property.

Change is starting to happen. The market is not being pushed one way or another by tax incentives. But it is being pushed by consumer preferences.

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