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Real Estate’s One Percent

High-End Home Sales Growth Strong, Lower End Price Segment Contracting

Sam Khater

While there’s been a lot of analysis of income inequality and the income level of the population’s “one percent,” there has been very little analysis of residential real estate’s “one percent.” Historically over the last two decades, homes that sold for over 1 million dollars have accounted for 1 percent of all sales, which serves as a useful proxy. The share of million-dollar home sales was below 1 percent for most of 2003, but steadily increased between 2004 and 2006, reaching as high as 1.8 percent in April 2006, when national home prices peaked. But even after prices peaked and began to decline, the share of million dollar home sales continued to increase, peaking in June 2007 at 2.2 percent, more than twice the share just five years earlier. Although the overall housing market was clearly slowing by then, the 1-million-dollar share remained high, averaging nearly 2 percent, or twice the historical level, until August 2008.

As the financial markets collapsed in September 2008, so did million-dollar home sales, and by February 2009, the million-dollar sales share was back to 1 percent, the same level as in December 2003 (Figure 1). Then as the financial markets stabilized and rebounded in the second half of 2009, so did the sales of million-dollar homes with the share rising to 1.5 percent. Over the next three years as the S&P 500 steadily rose and eventually hit all-time highs, the million-dollar home sales share also rose, reaching 2 percent by mid-2013 and remaining at that level since then.

The timing of the drop and rebound in million-dollar home sales and the stock market was no coincidence. Several studies document the wealth effects of financial and real estate markets on consumption[1]. These studies typically conclude that housing-wealth effects are much larger than financial-wealth effects, primarily because homeownership rates are much higher than stock ownership rates. But for real estate’s “one percent,” the stock market is a barometer of the wealthy consumer’s confidence. This is clear given that million-dollar home sales and the S&P 500 are highly correlated. In fact, the S&P 500 serves as a very good two-month leading indicator of million-dollar home sales. While the S&P 500 dipped in the last few weeks of January 2014, as of mid-February, it remains at roughly the same level as in December 2013, so one can expect million-dollar home sales to remain strong as long as the stock market remains high.

But enough about the real estate “one percent.” How is the rest of America doing? It turns out that there are many lower price segments enjoying healthy sales growth. The fastest-growing sales segments are those with prices between $650,000 and $950,000, where sales are 33 percent higher than a year ago (Figure 2). Not only is that segment doing well, but home sales in the $350,000 to $650,000 range are up 26 percent year over year. Sales are clearly weaker in the $150,000 to $300,000 range, up only 12 percent from a year ago, and sales below $150,000 are contracting, but that reflects several factors, including the rapid run up in prices and the decline of REO, investor and cash sales, which are concentrated in this segment.

The relationship between consumer confidence and spending is well-established, but it doesn’t always affect all segments of the real estate market equally.  The real estate “one percent” has benefited from the gains made in the financial markets over the past three years. Where the financial markets go in 2014 will determine how many homes the “one percent” purchases in 2014.

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[1] Shiller, Quigley, Case. Wealth Effects Revisted 1975 -2012. December 2012.