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Boston's One Dalton tower under construction.
Hello, Wall Street roller coaster. Goodbye, luxury real estate market.
Boston luxury home prices actually fell – that’s right, fell – a substantial 4.7 percent in the third quarter, to an average of $3.6 million, Redfin reports. Boston saw the sixth-steepest decline in luxury prices, with the top five losers all boom-and-bust Florida cities like Sarasota, Delray Beach and Fort Lauderdale.
The decline on the high end happened even as prices in the remaining 95 percent of the market rose 7 percent. It’s official confirmation of what real estate pros have been noticing for a while: a buildup of inventory at the high end of the market not just in Boston, but in tony MetroWest suburbs and on Cape Cod as well.
It’s no coincidence the luxury market, so strong for years in Boston and the suburbs, is starting to flag as 2018’s stock market turbulence turned into a rout in the final weeks of the year.
The luxury real estate market in New York and in other cities has already absorbed some big hits amid the stock market’s gyrations and a flood of new, multimillion-dollar condos. In fact, the luxury market in the Big Apple is in a full-fledged correction, with some buyers forced to take a 30 percent haircut from the price they bought at just a few years before, according to The Wall Street Journal.
“A great deal of the slowing price growth among luxury homes can be explained by the stock market, a strong indicator of luxury homebuyers’ wealth, or at least their perceived wealth,” Redfin chief economist Daryl Fairweather wrote in a report from the real estate firm.
Why Rocky Stock Market Matters
A growing economy, low interest rates and plentiful jobs typically equate to rising home sales and a healthy real estate market.
After all, most homebuyers fall somewhere on the spectrum of our nation’s still-large middle class, where such minor details like stable employment and an access to affordable mortgage financing can spell the difference between buying a home and sitting on the sidelines.
Luxury buyers are far more likely to have significant investment portfolios packed with stocks and bonds. Whether these buyers decide to snap up a condo in one of the city’s newest luxury condo towers, or instead opt to stay put is much more likely to depend on the health of their investments.
A common area in Boston’s One Dalton luxury tower.
An epic bull market over the past decade helped fuel luxury home and condo sales in Boston and in major cities around the world, with an amazing number of wealthy buyers putting down mostly or even all-cash in deals for multimillion-dollar digs in new towers in the Seaport, downtown and Back Bay.
But the source of all that money began to run into serious trouble over the course of 2018.
After several months of turbulence, plunges and dramatic rallies, the stock market went into a tailspin in December, wiping out its gains for the year. While the Dow’s record-breaking, 1,086-point rally Wednesday threw a tourniquet on the bleeding, most certainly the market is in for a rocky 2019.
The stock market’s turbulence has created “uncertainty among wealthy individuals” while also making “luxury buyers more sensitive to price,” noted Redfin’s Fairweather.
“The swings many people have been watching in their stock portfolios have only grown more frequent … so we expect this trend of slowing luxury home price growth to continue at least into the end of the year,” Fairweather wrote.
It will almost certainly be a rockier 2019 for the luxury real estate market in Boston and its environs.
New Units Could Overwhelm Boston’s Market
Along with the stock market mess, a surge in new luxury construction has been a key factor in driving down prices on the top of the market in Manhattan.
Roughly 1,775 new condos are projected to hit the Manhattan market by the end of this year, six times the number in 2011. Listings of condos $5 million and up have doubled over the past five years, to almost 800, according to the Journal.
It’s the same story in Boston. Well more than 1,000 luxury units in projects like the 61-story One Dalton are coming online over the next few years in a market that is a fraction the size of New York’s.
In addition, real estate investors appear to have scooped up a high number of units in some of Boston’s most prominent new condo towers.
Scott Van Voorhis
The Institute for Policy Studies looked at the ownership records of 1,800 luxury condo towers and buildings across Boston. The think tank found several signs pointing to a high level of investor ownership, including the fact that just 36 percent of the units’ owners applied for the standard property tax deduction used by city homeowners.
Such high levels of speculative condo buying probably don’t matter too much during good times. But the combination of flattening or even declining real estate prices with a bear market for stocks threatens to hit Boston’s many luxury real estate investors with a one-two hammer blow.
Stock market losses could very well prod some investors to try and unload some of those expensive Boston condos to raise cash.
Expect to see a growing number of luxury condos hit the market in the coming months. And if what happened in the stock market in 2018 is any preview of what’s ahead for the coming year, it should be a very interesting 2019 for luxury real estate in Boston.
Scott Van Voorhis is Banker & Tradesman’s columnist; opinions expressed are his own. He may be reached at sbvanvoorhis@hotmail.com.
