Cincinnati’s Luxury Home Market- What Happened? Do I Care?

Go ahead. Admit it. You like to peek in the windows. It’s why each year Homearama draws a crowd. It’s why Robin Leach hosted Lifestyle’s of the Rich & Famous, prompting MTV to run “Cribs”.  It’s why we flip through the internet photos of  $1,000,000 plus homes online that we will certainly never occupy.  It’s just fun and interesting to view the interior of luxury homes. To dream. To imagine. To steal decorating ideas for our more modest abode. Did you know that your Harvard educated brother –in-law and his physician wife will have a more difficult time obtaining a loan for their $1.5 million dream home, than you will for your lovely Polo Fields  or Cherry Blossom move-up home? Tis’ true!

Currently, there are 3 loan categories. Loans under $417,000 are considered conforming. Loans $417,000 – $729,500 are in the conforming jumbo category. Loans over $729,500 are considered super jumbo.  Jumbo loans remain quite costly compared to the interest rates for conforming loans.  Jumbo buyers with outstanding credit and plenty of available cash for a down payment are being viewed as higher risk borrowers than those seeking a loan with lower credit scores and minimal down payment funds.

Nationally, sales above $750k are down. A month’s supply of luxury home inventory, a.k.a, the absorption rate, continues to rise. This trend is occurring both nationwide, and in the Greater Cincinnati area. Check out these numbers, by year, sales over $700,000. All stats, of course, from The Greater Cincinnati Multiple Listing Service:
               2000 – 118          2005 – 334  ** Peak of the housing bubble**
               2001 – 141          2006 – 327
               2002 – 200          2007 – 288
               2003 – 211          2008 – 209
               2004 – 283          2009 – Nearly ½ way through the year, “drum roll please”!    29 !!

Overall, precious few of us will ever need to obtain a jumbo or super jumbo mortgage, so you might wonder if this affects us. The answer is, of course, absolutely.  As these jumbo mortgages become increasingly difficult to obtain, many luxury buyers are forced to liquidate their assets to make the home purchase. The rest of us call that “paying cash”. Even though paying cash for a $1,000,000 plus home may be “do-able”, many are reluctant to do so when they should be able to find long term, low interest debt like the rest of us, and keep the cash right where they have it now. Presumably, making more cash.  The reluctance is obvious, as the shear volume of luxury sales has plummeted.

Jumbo Loans are Difficult to Obtain

This current scenario is doing its part to slow our economic growth, and certainly is inhibiting the “chained cougar” known as the Housing Market. The Housing Market is ready, willing, but not quite able to lead us out of our current economic situation. Unleash the “chained cougar”, and history tells us the Housing Market will start running toward recovery, and most of the rest of the economic sectors follow.  The ability to not just purchase, but to re-finance the high rate jumbos into lower rate loans would certainly help to give a kick in the seat of the pants of this sluggish economy.  If these jumbo borrowers were able to reasonably re-fi and save an estimated $6000 – $15,000 yearly on interest payments, well, wouldn’t they?  Money then free to be spent on vacations, education, clothing, and re-investment, potentially jump-starting and feeding other areas of the market.

The National Association of Realtors is doing there part to stir the pot on this issue.  The NAR has proposed that Congress and the White House take a close look at making permanent some rules that have been temporarily put in place recently to loosen the jumbo market. We’ll see how it goes. In the meantime, it’s back to window peeking.