Changes in the economic landscape over the past few years have caused almost everyone to pause and re-evaluate many aspects of their lives, chief among them their finances and discretionary expenditures. Self-examination has led many to the conclusion that more is neither always better nor more satisfying. Sometimes more is only more. Whether by choice or necessity, the conclusion for many has been to elect to live with fewer things. The well heeled are choosing simpler lives as well, but with a particularly interesting twist: they will live with less, but only as long as what they have is the best.
Few purchases are more discretionary than high-end residential real estate, so an increasing emphasis on quality has had a tremendous impact on this market. Economic events have triggered massive changes in buyer capabilities, preferences, and trends, which collectively will dictate the course of this market for many years to come. I recognize that most people are only following statistics of sales prices and volume, but those numbers are the latter half of the story. It is far more important to understand the changes in buyer preference and behavior, as everything else is a result of these changes.
When asked about how much real estate values have declined in recent years, I first have to explain how changing patterns in demand are affecting values, because the percentage of declines is not consistent. Less desirable properties, which I call “second tier,” have declined more in value in recent years, proportionate to all properties. They also are much harder to sell today. This is an indisputable fact. Their decline in value is attributable to the combined forces of different markets. In different market conditions (when sellers had the advantage), buyers had fewer options, time worked against them in negotiations, and they were much more forgiving about a property’s shortcomings. They overlooked quality in favor of opportunity. Because of this, these buyers frequently overpaid. If you believe that many buyers overpaid in past years, be assured that the ones who bought second-tier properties likely overpaid by the largest margins. Now extinct financing vehicles played their part as well, fueling financial irresponsibility, imprudent decisions, and speculation.
In contrast, in today’s market buyers have more opportunity than they need; any property’s shortcomings are easily identified by comparison to other available homes and recent sales; and due to the accumulation of inferior homes available for sale, the prices for second-tier properties have fallen more proportionately, simply to attract buyers. In today’s market, it is harder to sell an average home at a heavily discounted price than it is to sell a superior home at a relatively impressive price. Quality, in all aspects, has emerged at the forefront of the property-selection process.
Aspects of a property’s quality that are compelling in today’s market are location, physical condition, and utility, or ideally a combination of all three. Price naturally has its place as well; however, the dollars are calculated after measuring aspects of quality with an increasingly discerning eye. Unfortunately, this monumental shift in consumer behavior is eluding many buyers, sellers, and real estate professionals today. I am always disappointed to hear an agent explaining to his or her client that macro-level forces of the economy are the villains behind the home’s failure to sell when actually the particularities of the home are far more to blame.
The flight to quality is certainly not unique or exclusive to residential real estate. The concurrent record sales and record failures witnessed in the art world this summer are evidence that deficiencies in quality are often the fatal barrier between prospective buyers and marginal objets d’art. The “good stuff” is getting all of the attention. Quality has the ability to overcome doubt. Quality has the allure that attracts discretionary investment – investment that might otherwise be willingly sidelined, even in the absence of any compelling alternatives. As with buyers in real estate, buyers of expensive art are carefully sifting through an assortment of options, many mediocre at best, passing on most, and only opening their wallets for the truly special.
I try to avoid passing along market generalizations, especially when they are derived from data detailing macroeconomic trends. They don’t tell a complete story. On a local level, I avoid the irrelevant and misleading, such as sales data tracked by zip code, prices-per-square-foot, and other mostly meaningless measures. Be wary of misattributed macroeconomic data and overly generalized trends. For most local luxury properties, the sample is too varied and the sales too infrequent to average it all together in an attempt to create an accurate picture. Buyer preference is the single most important specific force overlooked when assessing the luxury residential real estate market today, its relative strength, the differing rates of appreciation and depreciation, as well as a particular property’s likelihood of selling and at what price.
If you are contemplating selling, objectively assess your home and its comparative weaknesses. If you are buying, study your prospective purchase with an equally objective eye. While you may be only buying or selling one home, it is inescapably connected to the market in which it is located, influenced by the competitive offerings, and its value determined by highly scrutinizing buyers who would often be just as happy to leave their checkbooks at home.
Today clients tell me they are especially concerned about quality and value. For most, the amount of quality they get for their dollar is what determines value. Since most would prefer to spend less, the natural outcome is that they focus more than they ever had before on getting the best for even less. With regard to luxury residential property, this preference manifests itself as an increasing demand for the best available properties, with a concurrent diminishing interest in second-tier and lesser properties.
While most people are willing to live with fewer things (homes included), they simply wish for them to be better things, especially if these things are the elective purchases being contemplated today.
