Just four years ago, real estate
sellers, buyers and speculators were enjoying optimal conditions. Both the
federal funds rate and prime interest rate were at or near all-time lows and
housing prices were climbing. Sellers were able to price their homes higher than
they ever thought possible, and successfully get their asking price or more.
Meanwhile, homeowners were refinancing to create liquid wealth, and buyers were
able to afford more than they ever dared hope. The American dream was coming
true for everyone, both low-income citizens and the very affluent.
As interest rates have climbed since then, mortgages have
become less attractive. Home prices are sliding, but not at the same pace at
which rates are increasing. These dynamics conspire to create a sluggish
environment for home sales. On a relative basis, residential real estate seems
downright moribund. This turn of events has surely affected low-income people,
the middle class and even some of the wealthy—but the very affluent have
experienced few of these shifts. This demographic continues to buy homes and
improve them with renovations and additions at the same pace they did when the
market was hot.
To better understand the insulating effects of wealth in the
real estate market, in the first quarter of 2003 we surveyed 308 affluent
homeowners about their personal residences. In the first quarter of this year,
we updated the survey, questioning 326 different (but similarly wealthy)
individuals. This is what we found:
• The perspectives and plans of individuals with a net worth of
$1 million to $10 million have flipped 180 degrees from what they were in
2003.
• Those with wealth in the $10 million to $20 million range
exhibit similar behavior, but to a lesser degree.
• The wealthiest segment, with more than $20 million in net
worth, remain constant in both their actions and plans regarding real estate, as
if there has been no change in housing inventory, prices and mortgage rates over
the past four years.
There is a statistically significant decrease in the number of
residences owned by families with a net worth of up to $20 million (Exhibit 1).
In today’s real estate market, they are less inclined to own as many homes as
they once did. The wealthiest group, however, continues to own, on average,
more than three homes, because it suits their lifestyle.
In 2003, roughly half of all the affluent families surveyed
considered their residential real estate an investment. This figure dropped to
about one-third in 2007 (Exhibit 2). Families with a net worth between $1
million and $10 million revealed a significant proportional drop, while families
with a net worth between $10 million and $20 million showed a slight
decrease.
Again, the perspective of the wealthiest group hasn’t changed;
they never viewed their personal residences as investments, and still don’t.
They have no plans to profit from their real estate purchases and are focused
instead on enjoying them.
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