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5 Reasons Why the Million Dollar Home Market Will Not Recover Soon

Posted on July 14 By MLP Blog

1) Nothing to Provide a Price Floor

The ratio of what it costs to rent a home compared to the price it costs to buy can help hold up home prices in most markets. So if the market drops too much investors come in and buy up homes before they get too cheap, which creates a floor and holds up the market price.

However, homes in the million dollar range are not highly sought after by renters, so the rent ratios do not help create a floor on the prices. This lack of a floor means there really is no idea of how low homes could go. It makes for a weary home-buyer which decreases the demand on homes in this range.

2) Alternate Options for Potential Homeowners

-Rental Options

Even though there is not a large rental market in luxury homes, those wanting to live in one can often find rental options much cheaper than if they bought a home. This may sound like good news as maybe it will help create a floor as mentioned above, but it doesn’t do much since the price to rent ratios are much too high to allow an investor to justify those prices. This means the people renting are usually homeowners who can’t sell their home. So there may be a price floor, but we are nowhere near it.

-Smaller Homes

People are now more and more willing to live in a smaller home. They are no longer interested in mansions and don’t want their mortgage to eat up such a large portion of their income. So they are opting for less expensive homes.

3) Appraisal Changes

From 2004-2007 appraisers were doing all sorts of illegitimate things that helped inflate the housing bubble. They were doing appraisals for more than the loan was worth so people could take cash out and use the cash to pay their mortgage. They were inflating numbers to get loans to go through when otherwise they may not have.

Over the past year many appraisers have had their licensing revoked or suspended for these infractions and the industry is going through a dramatic change. Appraisers are afraid to place a value on a home at a value even slightly higher than what it may get on the market. So they are reducing the appraisal prices much below market value to protect themselves, especially on the luxury homes where there is much more uncertainty than on ‘starter’ homes.

Many potential buyers of these homes are finding they simply do not qualify for a loan to buy million dollar homes, even though historically they would have easily qualified.

4) People are no longer viewing living in a home as an investment

People have long viewed owning a home as a wise investment. They feel they are building equity, but recent history has changed that belief. In fact, almost 1/6 of homeowners have negative equity. These people would have all been much better off renting.

In addition, the real estate meltdown has changed people’s attitudes. More and more people view a mortgage as something that “owns” them. The potential of a foreclosure can do damage way beyond homeownership options.

If appreciation does not happen and the homeowner wishes to move within a few years, they are going to get eaten up by Realtor fees. The Realtors will take $60,000 out of your $1 Million home sale.

Finally, when people do buy a home, as mentioned above, they are willing to accept a smaller home since they can’t justify a large % of their income going into their home. They can’t justify it as an investment any longer and would rather save money in another manner.

5) Lack of Jumbo Loan Programs

A drastic reduction in available warehouse lines for lenders has frozen the jumbo loan market and few companies offer this program. The few banks that offer a jumbo loan option are requiring a maximum of 70-80% LTV. Combine this with the appraisal issues and it could greatly decrease the number of people who could qualify for your home.

If the appraisal comes in 10% lower than the home sales price (which is extremely common) and the buyer needs 25% down, they will need to have about 1/3 of the purchase price in cash. Few people have the means as well as be willing to put over $300,000 of cash into their home.

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