Luxury Snaps Back

originally appeared in The Wall Street Journal:

With their children through college, a California couple decided to sell their three-bedroom Santa Monica, Calif., home in May and move to San Diego. Given the soft housing market, they weren't sure how buyers would react to their $1.8 million asking price.

They found out quickly. Within hours of listing the property, they had an offer for $25,000 above their listing price. They soon had six others. We got extremely lucky, says the 55-year-old actress, who bought the home 10 years ago for $1.1 million.

After a soft 2011, the luxury home market made a comeback in 2012, driven by growing buyer confidence, strong foreign demand, low mortgage rates, more realistic sellers and sharp drops in the number of home listings. Sales of homes priced at $1 million and above rose by 9% in the first nine months of 2012 compared with the same period one year ago to the highest level in four years, according to DataQuick MDA, a real-estate data firm that tracks public records in the 98 largest U.S. metro areas.

Still, many homeowners are finding that their homes are worth less than the peak values of six years ago. That has likely prompted some to hold their properties off the market. The supply of million-dollar-and-above homes being offered for sale dropped by nearly 8% this year, according to Realtor.com. Also, banks are taking back fewer foreclosed properties. Nearly 2,000 million-dollar homes went through foreclosure this year through October, down by 33% from the same period last year and by more than half from 2010, according to Zillow.

That has left more buyers chasing fewer homes, giving some sellers the upper hand.

There's a real shortage of inventory throughout our markets in the United States, according to the chief executive of Sotheby's International Realty Inc. We have many more buyers than the high-end homes that we have to sell.

At the current sales pace, it would take nearly 12 months to sell the supply of million-dollar properties available for sale in October, down sharply from 21 months one year ago, according to the National Association of Realtors. The supply shortage is becoming particularly acute in the West, where the supply of million-dollar homes stood at just six months in October.

In California, some 18,760 previously owned homes sold for more than $1 million in the first nine months of the year, a 14.8% increase from last year and the highest level since 2007, according to DataQuick. Buyers had better come to the table prepared, says a real-estate agent with Rodeo Realty in Los Angeles who represented the couple. She says 2011 was lethargic, adding, We didn't have a lot of inventory, but then, we didn't have a lot of buyers.

This year, bidding wars have become commonplace in affluent California markets from Brentwood to Palo Alto, where new land is scarce and where investors have pushed up prices by making all-cash offers to buy older homes that can be torn down and rebuilt.

I had so many calls this year from disappointed buyers who thought they had a deal, and the next thing they knew, it was a bidding war and they lost, according to the chief executive of the luxury brokerage Corcoran Group.

Those disappointments are helping to create urgency among buyers. When you have 25 offers on a property, you now have another 24 buyers who didn't get that home, according to the president of J. Rockcliff Realtors in San Francisco's East Bay. They realize very quickly that prices aren't going to get any better.

The real-estate agent with Rodeo Realty represented a buyer from Dallas who flew to Los Angeles to sign a purchase contract last month on the same morning that a $3.7 million Brentwood home hit the market. The four-bedroom home, which has a swimming pool and a guest house, drew better offers. But her client acted quickly and got the house, she says.

To be sure, many sellers are finding that their homes aren't worth anywhere near what they fetched at their peak, and sales are rising from extremely depressed levels of the past few years. Sales of $1 million properties for the first nine months of the year were nearly half of what they were in at the peak of the housing boom in 2006. Lending standards are still conservative. Banks generally require at least 20% down payments and excellent credit and are thoroughly scrutinizing a borrower's income and the property appraisal.

A local Chicago-area homebuyer and his wife were shocked when their offer to pay $1.3 million for a five-bedroom home in Glenview, Ill., listed at $1.6 million was accepted. We thought there was a 1% chance they'd say yes, he said, who is thrilled with the home that sits on the golf course of the local country club.

The homebuyer was ready to buy last year, but he had trouble qualifying for a loan. Because he runs his own small business, a sales-consulting firm, he struggled to meet tougher underwriting criteria that require him to prove his income with two years of tax returns. After renting for 18 months in the suburbs, he found a bank that was willing to make the loan.

For the past few years, strong foreign demand has also helped to push prices higher for trophy properties in Manhattan, beachfront properties in Long Island's Hamptons, and newly built condominium towers in South Florida. Canadians, Asians, Brazilians and Europeans have been lured by a range of factors: fears of a real-estate bubble at home, a favorable exchange rate and the desire for a safe place to park their cash.

The big difference this year was that the Americans finally got off the fence, according to the owner of Daley and Company in Vero Beach, Fla. Europeans and Canadians had accounted for the bulk of her sales in 2011.

Few luxury markets did as well this year as those benefiting from the technology stock boom in the Silicon Valley. Atherton, Calif., topped the list of the most-expensive markets in the U.S., with an average home value of $3.77 million, up 18% from one year ago, according to Zillow. Values rose by 20% in Los Altos, Calif., to $2.16 million, and by 19% in Marin County's San Anselmo, to $2.17 million.