The market for real estate is continuing its bounce back upwards from its frightful post-recession lows. The westside of Los Angeles – from Beverly Hills to Malibu to the Hollywood Hills – is predominately considered a luxury real estate market and it has been a hot topic of late. But why is it doing so well? Finding one or two specifics to pinpoint the exact cause of this sharp rebound would be presumptuous as there are so many factors that influence the real estate market. But the trends and statistics don’t lie and they are telling us that there is no cause to buck the recent hot trend in several markets.
Prudence tells us that there is no reason to believe a sharp, downward collapse of the stock market is feasible due to the overall strength of the current economy and lack of any large known “bubbles” which would be propelling the S&P 500 from its recent all-time highs. This leads to a consensus that the trend for the spring home buying season could ultimately bring increased home values and increased demand. Particularly so for the high-end properties in ones portfolio. NAR (National Association of Realtors) reported that home sales valued above $1 million increased by almost a third in year-over-year valuations. A very decent return for those who purchased in 2012 and very welcome news for long standing home owners.
Understanding that the luxury real estate market is showing strength is great news in and of itself. However, understanding the overall underlying principals to why this is happening can help provide a sturdy foundation to projecting future trends. And of course, future well-being financially.
The first thing we want to acknowledge is the stock market. The Boston Globe writer, Shirley Leung, a Princeton graduate and business columnist pointed out that the stock market has room to grow:
When you start looking at the numbers, it’s actually quite extraordinary to see how far the stock market has roared back — and how we have mostly chosen to ignore it. Five years ago this week, the Dow Jones industrial average skidded to the 6,500-point level as the world churned through a financial crisis and the Fed desperately pumped money into a lifeless economy. At Tuesday’s close, the Dow was just shy of 16,400, following a year in which it grew by nearly 30 percent. That means you didn’t have to be legendary investor Peter Lynch to figure how to make money in the market. Put it another way, if you kept investing in the biggest US stocks near the October 2007 market peak through the end of February, $10,000 would have swelled to over $13,800, including dividends, according to a Morningstar analysis of the S&P 500. If you pulled out near the bottom, you would have lost close to $5,000. Despite eye-popping returns, a lot of cash is still sitting on the sidelines in safe CDs, money markets, and probably under a lot of mattresses. The memories of two big crashes less 10 years apart are seared into our 401(k) portfolios. That’s one of the reasons some Wall Street gurus don’t think we’re heading into a bubble — the point at which good times suddenly implode. Sure, corporate profits are expected to rise, interest rates remain low, and the nation’s economy is growing, but droves of mom and pop investors have yet to jump into stocks, prompting a new round of buying that would push healthy stock prices even higher. “Because it is such an unloved bull market,” said Sam Stovall, chief equity strategist at S&P Capital IQ, “the market still has room to move.” – Boston Globe
With American companies reporting positive earnings, quarter after quarter, there is no reason to suspect a long, retracted pull back in the stock market.
Our second principal to the underlying strength of the luxury real estate market is the continued growth from foreign investors. Asian, and specifically Chinese tycoons are pouring billions into the American real estate market.
Chinese demand for U.S. property will likely propel the country to become the world’s top recipient of cross-border real estate funds from a single country over the next two years, investors at a conference for private-equity investors in Hong Kong said this week. – WSJ
This demonstrates the open, free market system that the United States cherishes as a highly attractive spot for those looking to invest from abroad.
Finally, we have seen many homes in our neighborhoods being torn down. Home builders and investors understand that their is no room in our beloved Los Angeles to build, so they must purchase older homes and tear them down and rebuild. The simple economics of supply and demand tell us that home buyers are looking for newer, upgraded homes and they will have to be built right next door.
Of course, owning a beautiful high-end home is not all about economics. On the contrary, we should always believe that America will be readily able to grow in the long term and so we should live luxuriously as we all deserve to do. You have no doubt, worked hard all your life and you deserve to come home to a house you are proud of owning. Plus, finding that special place you can seclude yourself into away from the noise of the big city is no small thing.