Luxury home sales doing well

Whenever someone starts musing about declining property values, I smile to myself thinking back to my first house sale. The total price my clients paid was $18,000 for a 2-bedroom, one-bath bungalow in a seedy neighborhood. The total commission amounted to $1,080 of which my office received half. Since I was a new agent, I only received half of that. Last month I helped another client buy a home in El Dorado Hills. The price tag was in excess of a million dollars. My commission check exceeded the entire sales price of my first sale. I suspect that 30 years from now today’s housing prices will seem ridiculously low and buyers will be lamenting abut not finding anything under two million dollars.

Even in our current market, million dollar deals are not unusual. The luxury home segment of the market is down only slightly in comparison to the total market. While total home sales have declined by 40 percent from their 2005 levels, luxury home sales priced in excess of a million dollars, have only dropped 5 percent with 109 recorded last year and 60 recorded sales so far this year. So why do luxury home sales continue to do so well?

Luxury homebuyers are not affected by market sensitivities such as increased interest rates or more stringent loan underwriting criteria. The typical luxury homebuyer will have a sizable downpayment, usually in excess of 30 percent. Many luxury homebuyers do not need lender financing, having already sold an expensive home or other investment property where they had a high equity position. This eliminates the uncertainty of appraisals and loan contingencies.

The average selling price of a home in El Dorado County last month was $545,000. Of the 145-recorded home sales last month, 15 sold in excess of $900,000 and 6 of them were above one million. In the last six months 60 new and resale homes have sold in excess of a million dollars. The average selling price for homes selling in excess of a million was 1.3 and the average size for a home in that price range was 4,270 square feet. Two-thirds of all luxury home sales are located in El Dorado Hills and only 14 of the 60 were located on acreage.

About once a year I have the opportunity to work with a homebuyer in the million dollar plus price range. They have some expected and unexpected difference. When I was a new agent, I was intimidated when showing luxury homebuyers properties but soon discovered most are as comfortable being chauffeured around town in a Chevy as in a Mercedes. Since many are new to the county, they are keenly interested in an agent’s knowledge of the community, schools and recreational facilities. Typically, a luxury homebuyer is more concerned about lifestyle and neighborhoods than bedrooms and baths. Quality is more important to them than square footage. Many are without children living at home and will be attracted to a country club social environment. The security that gated communities offer is also important.

The largest percentage of luxury homebuyers in our county is in the 49 to 62 age group. These baby boomers have reached their peak earning years and are benefiting from a rising stock market, historically high prices from selling their previous home and/or a sizable inherence. The most common occupations for luxury homebuyers are entrepreneur, business executive or medical doctor. This will be their third or fourth home purchase and they will delegate much of the negotiations to a non-working spouse or rely on their trusted real estate advisor. As a busy professional, their time and attention is limited.

A few years ago I found myself chasing a doctor client down a hospital hallway on his way to surgery. A counter-offer required his timely signature. I handed him the papers on a clipboard to review and without missing a step he signed the papers and shoved them back at me. “Aren’t you going to read them?” I asked. “Why should I?” he replied, as he entered the operating room “That’s what I have you for!” while the doors closed in my face.

Increasing home values, economic prosperity and generational wealth transfer will increase the number of million and multimillion dollar home sales. The number of millionaires in the US has reached an all time high of 9.3 million households as of mid-2006. Locally, El Dorado Hills has one of the highest per-capital family incomes in the state. Could El Dorado County become a primary destination for luxury homebuyers from the Bay Area? That’s a safe bet. Already our county has a higher percentage of luxury home sales than either Sacramento or Placer Counties. Sacramento recorded 142 million dollar plus home sales last year and Placer County reported 179 of which 107 were located in Granite Bay or Loomis.

The average price of a county home doubled between 2000 and 2006. If history repeats itself, we all may end up living in million dollar houses.

More Property Taxes

The California Association of Realtors (CAR) opposes private transfer taxes and has sought legislation that would prohibit them. But CAR's efforts to prohibit or at least limit private transfer taxes have run into serious resistance.

Private transfer taxes are not really taxes; only government has the ability to tax. Rather, they are fees. Nevertheless, they sure act and feel like taxes. These fees are deed restrictions imposed by a developer which require a fee to be paid every time a property within the development is sold. Already a county transfer tax in the amount of $1.05 for every thousand in sales price is sent to the tax collector and some cities like Sacramento has a city transfer tax.

Some private communities like Auburn Lake Trails in Cool charge a transfer tax
The private transfer taxes that CAR opposes differ in important ways. There is no requirement that their proceeds be used to benefit the individual property or the neighborhood. This is perfectly legal. Indeed, even individuals can do this. For example, I could place a deed restriction on my house that would require that, in every future sale, 1 percent of the purchase amount would go to fund the Calhoon Family Perpetual Vacation Fund. Of course, no one would then be inclined to purchase the property.

Why would a developer impose a private transfer tax? The word "extortion" comes to mind; but let me illustrate with a fictional example. Suppose you are a developer with a large project standing before the various governmental agencies who must approve it.
I come to you on behalf of my organization, Friends of the Gnatcatchers (FOG) with this "proposal." They respond, "If you will set up a fund to purchase and preserve a certain gnatcatcher habitat -- which, by the way, is thirty miles from here -- we will not sue to block your development on environmental grounds. Otherwise, FOG and its friends will see you in court and guarantee that you'll be there for years." This deal may be agreeable to you, but where is the money to come from? A private transfer tax. Every time -- not just the first time -- a home in the development is sold, 1 percent of the purchase price will be assessed and deposited into the gnatcatcher fund administered by FOG.

Doesn't the imposition of a private transfer tax hinder the developer's sales? Not so far, for at least two reasons. First, sometimes the fee is not assessed on the first sale, so the original buyer doesn't feel it. It only kicks in for subsequent sales. Second, disclosure and explanation of these fees has often been weak -- buried in the volumes of disclosure documents which most people don't read very carefully anyhow.

CAR sponsored Senate Bill 670 (Correa) which would have prohibited private transfer taxes. However, that bill was strangled in committee and is going nowhere. On the other hand, there is Assembly Bill 1574 (Huston) which would, for the first time in the law, specifically allow such fees, with very little restriction on their amount, duration, use, or cost of administration. That bill is moving smartly through the legislative process, despite CAR's strong opposition.
Why? After all, being against private transfer taxes would seem to be a motherhood and apple pie sort of position -- keeping down the cost of housing, protecting innocent consumers, etc. Moreover, it is hard to imagine that legislators have heard much from constituents in favor of private transfer taxes.

The answer, as always, is in politics, which sometimes has to do with money. Legislation specifically enabling private transfer taxes is supported by a powerful and paradoxical coalition: the California Building Industry Association and the Sierra Club (along with other environmentalist groups).

At a recent meeting of CAR directors in Sacramento, their chief legislative advocate remarked that this was probably the first time in history that the Sierra Club and the building industry have been on the same side of an issue. But, then, both stand to profit from this one.