Given that the real estate market is supposed to be in free fall, some strange things have been happening recently in Mill Valley.

Given that the real estate market is supposed to be in free fall, some strange things have been happening recently in Mill Valley.

It is one of the expensive suburbs of San Francisco just over the Golden Gate Bridge, and much of the housing market there seems to be doing just fine. One three-bedroom house sold for US$1.4 million last month without ever being officially put on the market. The seller accepted a pre-emptive bid - US$20,000 above the asking price - from somebody who had heard that the house was about to be listed for sale.

‘The homes that are having a hard time selling are the average-priced homes,’ said Vanessa Justice, a real estate agent with Pacific Union GMAC in the Bay Area, where the median house price is about US$750,000. For upper-end homes, she said, ‘it’s actually pretty crazy right now’.

It has been a while since real estate agents used the word ‘crazy’ in a positive way, but Ms Justice is onto something here: The high end of the market is surviving the slump much better than any other segment. Even as foreclosures keep rising and overall sales continue to plummet, more expensive homes have staged a bit of a comeback in recent months. They’re spending less time languishing on the market than others, and their prices appear to be holding up better.

This split in the market helps explain why the sales of Manhattan apartments, some of the priciest homes in the country, have remained fairly strong. The national trend has gone largely unnoticed, though, because neither the federal government nor the National Association of Realtors - the main sources of housing data - report statistics for different price segments.

But after just about every home sale, documents must be filed with a local government office. A research firm called DataQuick Information Systems gathers these records, and a New York Times analysis of them shows that the story of today’s real estate market is really two different stories.

In the Boston area, for instance, the number of homes selling for at least US$1 million plummeted to 619 in the first five months of 2006, from 773 in the period in 2005, according to DataQuick. But the number jumped to 711 in the first five months of this year.

In the New York region, sales at the top end - that is, homes in the most expensive 5 per cent of the market - have also been rising, while they have been falling in the middle and bottom of the market. The same is true in the San Jose, California; Seattle; Denver; and Houston areas. In San Francisco, Los Angeles, Phoenix and Miami, high-end sales are down but not by nearly as much as sales in other price segments.

Separate statistics from the California Association of Realtors also show million-dollar-plus homes to be selling better than others in that state. The high-end market is far from booming, to be sure. Many houses would still sell for less today than they would have a year ago. But the market has stayed strong enough to catch a lot of buyers and sellers off guard. They keep hearing about a real estate meltdown and then finding a different reality when they go to make a deal.

A three-bedroom apartment around the corner from the Guggenheim Museum, on 88th Street near Fifth Avenue in Manhattan, was recently put on the market for US$2.8 million, and the first bid came in slightly lower than that. Ten days - and nine bids - later, the seller accepted an offer about US$500,000 above the asking price.

In Brookline, Massachusetts, near Coolidge Corner, a big Victorian house went on the market for US$1.4 million this spring - just as it had in 2006, without selling. ‘I thought it was still overpriced,’ said Chobee Hoy, the seller’s real estate agent. Yet the house ended up selling for about US$30,000 more than the asking price.

There seem to be three main causes of the split in the market. The first is that affluent families continue to do better than others, thanks to healthy income gains and a rising stock market. ‘To some extent, it is the rich getting richer,’ Andrew LePage, an analyst at DataQuick, explained. ‘The folks who don’t rely solely on a weekly or monthly paycheque seem to be doing better.’

The upper-end of the market has also been helped by an influx of well-off foreign investors whose buying power has grown with the recent decline of the dollar. Hard as this may be for an American to imagine, New York, San Francisco or Miami can now seem like a bargain, compared with London, Moscow or Sydney. Jason Haber, an agent with Prudential Douglas Elliman in Manhattan, said he had recently taught himself how to convert square feet into square metres - you divide by 10.8 - because of all of the international buyers traipsing through New York apartments.

Finally, both the recent rise in interest rates and the problems in the mortgage market have had a much bigger effect on low-income and middle-class buyers than affluent ones. It has become harder to get a subprime mortgage, while the uptick in interest rates this year has added about US$100 to the monthly payment on an average fixed-rate 30-year mortgage.

As Mark Zandi, chief economist of Moody’s Economy.com, summed up the market: ‘The low end is getting creamed. The middle is struggling. The high end is running on its own dynamic.’ It’s tempting to conclude, then, that the top of the housing market has somehow become bubble-proof. And some real estate agents will doubtless make this pitch to buyers who are on the fence. But it is almost certainly wrong.

In fact, the very top of the housing market - the sprawling vacation homes and 10,000-square-foot mansions - seems to be doing considerably worse than merely expensive homes. Ines Hegedus-Garcia, an agent in Miami, recently looked at sales volumes there and found the market for homes that cost US$1.2 million to US$2.5 million to be holding up decently. The situation was much worse for those priced above US$2.5 million. There are also a couple of areas, like Washington and San Diego, where the high-end of the market, broadly defined, is already doing about as badly as everything else. So perhaps the recent comeback won’t last long in other cities.

Remember, it’s not as if the wealthy are immune to irrational exuberance. Just think back to the 1990s - or the 1920s. Any asset can end up becoming overvalued. Right now, though, there is a bit more of a rational explanation for home values at the high-end of the market.

Source: The Business Times, 12 July 2007