David Bach, author of The Automatic Millionaire, which spent 31 weeks on the New York Times bestseller list, states on his website, “The fact is, you aren’t really in the game of building wealth until you own some real estate.” This advice from a well-respected millionaire has been a commonly held belief for decades. However, there seems to be a growing slowdown in the demand for luxury homes, which is having people question the value of homeownership.
Is homebuying an escalator to wealth?
As demand decreases, this is putting pressure on the value of homes. For the fourth consecutive month, there has been a decline in the average sales price of detached homes throughout North America. Certainly, these shifts are not dramatic, but with speculation of a slowing global economy, there will be even more stresses on the upper-tier market.
Bach further states in his book that “buying a home is an escalator to wealth.” How is this possible in a slowing market?
The answer lies in understanding the niches of opportunity that exist within the market at any time. This month’s edition of the North American Luxury Market Report by the Institute for Luxury Home Marketing investigates some of the niches that are currently in favor with real estate investors.
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Niches of opportunity
Increases and decreases in demand
According to the National Association of Realtors (NAR), the traditional market is seeing an increase in demand. Their recent report indicates that there are more interested buyers than active sellers, meaning that inventory may be increasing, but there is still a shortage of supply. In most cases, the increase in demand ultimately drives home prices higher.
The decrease in demand for luxury homes, coupled with the increase for traditional homes, creates opportunity in the niche market between these two price points. Homeowners from the traditional market now have the ability to move into the home of their dreams with prices no longer outside their reach.
Avoiding heavy taxes
Increasing taxes in major cities are also an added burden for those looking to purchase a luxury home. However, following the trend of owning in a state-of-the-art, amenity-driven building or complex or a home with smart, space-saving architecture, translates into a savvy buyer purchasing a smaller contemporary living space at a lower price.
Choosing to live in this niche helps avoid the heavy taxes of the very high-end price point. But more importantly, it affords a lifestyle that offers luxury amenities, easy access to travel, and time to relax or partake in a favorite adventure or activity. As well as the opportunity of owning multiple homes—in other parts of the country or abroad.
Looking beyond the major cities
Another niche experiencing growth are the luxury markets in locations outside the major metropolitan areas such as Sacramento, Boise, Colorado Springs, and Spokane, but close enough to travel to a metropolis, if and when necessary. This growth is being driven by those who can telecommute and are seeking more affordable markets to maximize the value of their money.
Also increasing in popularity are towns that are in the midst of revitalization—often home to cottage industries and entrepreneurial online businesses that actually benefit from being positioned as a drivable distance from an expensive city. A major draw for these towns is the sense of community, safety, and enjoyment of a slower-paced lifestyle.
On the opposite spectrum is the niche market of high-end developments within larger and emerging cities that are attracting luxury investors.
Immediately recognizable in this niche are the redevelopment of industrial, dockyards, and warehouse locations that developers are redesigning or gentrifying. San Francisco is truly representative of this movement, with seven sections of their city seeing a blend of luxury apartments to low rental units, commercial space, parks, and restaurants. These developments are attracting many young, wealthy homeowners who want to buy turnkey residences.
Green building trends
Developers who build with an eye towards environmental responsibility have been rewarded with high demand. Buyers are paying top dollar for properties that properly utilize green building technology and carbon neutral energy programs, incorporating outdoor elements within the design, and implementing cleaner air systems and paint.
Many developers and architects are not seeing LEED (Leadership in Energy and Environmental Design—the gold standard of environmentally conscious and energy efficient design) as a plateau to reach. Instead, it is their starting-off point for a new way of thinking as well as making economic sense for future generations.
Decline of mega-mansions
Developers have also recognized the opportunity that lies in the decline of demand for mega-mansions. 10–20,000 square foot homes are struggling to maintain their huge price tickets, especially as many need a big investment in renovations to bring them up to modern standards. But in locations such as Vancouver, BC developers are keeping these homes’ beautiful facades while sub-dividing and modernizing their interiors into luxurious 2–3 bedroom apartments.
The most lucrative real estate niches largely depend on market trends and shifting buying interests, but some are long-time money makers. For detailed market statistics, download the North American Luxury Market Report by the Institute for Luxury Home Marketing.