Does the shape of the recovery matter for luxury real estate?
Is it a V, a K, or a shape that is something else entirely? Pundits are starting to consider a K-shaped recovery in the economy as a consequence of COVID-19. As a former wealth manager, I can tell you academically that there is not a K-shaped recovery in the study of economics. More so, this label is used to describe a situation where higher-paying service sector employees in the upward sloping leg of the K-shape achieve better outcomes, while essential workers and those in the hospitality and other hard-hit industries see a worsening economic outlook.
I start with this general analysis of the broader economy to shed light on the housing market’s current state, particularly the luxury segment, which is Valley Luxury Partners’ expertise. In my previous market update, I alluded to a “dual recovery” scenario as I had heard no specific mention of a K-shaped recovery at the time. That has changed, now that more evidence has come to light to validate this theory.
The prevailing narrative on housing is that we are in a “hot” housing market across all sectors—from first time home buying to properties in the luxury real estate market. Experts from the National Association of Realtors and other trade groups have promoted this hot market in numerous press releases, and the media has embraced the idea in earnest. What does that mean for luxury home buyers and sellers if we are in a hot housing market? Will the K-shaped recovery support a continued surge in demand, or is there something else going on?
A more nuanced analysis indicates that our supply levels are depressed in Arizona, and we are only starting to see more luxury listings come into the market. Pent up demand from COVID- 19 restrictions and buyers who have been looking for larger properties to support work from home mandates have pushed demand into the summer months when we would expect a slowdown. Some luxury sellers are still reluctant to list properties due to the complexity of showings and logistics surrounding the pandemic, which further depresses supply. When supply is low, and demand is relatively high, prices will hold or increase on the margin.
The continued rise in the stock market (which correlates to the upward sloping leg of the K-shape) still defies conventional wisdom about what should occur when 20+ million are unemployed and GDP growth has stalled in the U.S. and global economy. The rising stock market has provided a “wealth-effect” for the luxury sector, while low interest rates have provided a boost to a segment that typically pays cash and eschews financing and debt.
With all of the aforementioned in mind, there’s a one-million-dollar question: Is it a good time to buy or sell?
Where exactly does the current landscape leave a luxury buyer or seller in consideration of either action? Let’s take a step back and recall the hot market evaluation. What is the impact of these trends on buying or selling luxury real estate now? The buyers may be frustrated with rejection from multiple offers due to limited inventory and the realization that any COVID-19 discount is unrealistic. Bargain hunting is not happening now. Some sellers may still feel that now is not the right time to allow strangers into their house if they are still occupying the residence.
The buyer frustration comes from simple economics with demand exceeding supply. Agents may not be able to alleviate this. Still, they can make strong offers for realistic buyers who are not chasing bargains and are willing to buy with cash or have strong prequalification through a reputable lender. For sellers, a top agent can utilize all of the digital tools available to create a more “touchless” transaction and rigorously screen buyers for private showings as open houses are not the answer right now. Strong marketing always wins.
For those undecided and are waiting to enter from the sidelines, the upcoming election and year-end will bring about potential changes. A COVID-19 vaccine would undoubtedly be a game-changer in relieving fears of both buyers and sellers. Additionally, the stock market would react positively to a fully vetted vaccine (not perceived as being rushed by regulatory authorities). However, historically, the fourth quarter with an upcoming election is a volatile time for the economy and markets. I have recently learned from my wealth management colleagues that one large investor has over 50 million in options on the VIX index (the measure of investor risk and volatility). These options will either go to zero by December or pay him 1 billion dollars in upside gain. This individual believes there is a massive amount of volatility in this particular election cycle, and he is putting his money at risk to prove the point.
