Million Dollar Home Sales Jump

Million Dollar Home Sales Jump in U.S. as Wealthy Return

Home sales from Los Angeles to Charleston, South Carolina that are priced at more than $1 million are gaining at triple the pace of the broader market, according to real estate research firm DataQuick Inc.

Let's take a look at this Bloomberg article and apply a little reason and common sense with some facts thrown in for good measure.

First of all, why should anyone be surprised that the rich are buying? They're rich, right? They have the money, right? And there are surely bargains out there - or at least homes that are priced well below what they once were. You only need a modicum of facts and a dash of common sense to get this. But ths article becomes awry right away when it strays from simple common sense and makes a rather startling claim:

“The real estate recovery has been built on purchases by middle-class families, even though they haven’t been the ones to flourish during the recovery,” she said. “Now, the economy is getting a vote of confidence from wealthy homebuyers.”

First, despite all you've read, there's really no proof that there's a sustainable real estate recovery, nor is there any particular reason to believe that middle class families "built" an initial stage of that recovery. Homes are being bought "en masse" by investment pools. Those homes are, for the most part, scooped up, sometimes renovated, and used to create rental income for the investors. That's what's been going on to increase home sales, not purchases by middle class families. If you're not aware of this, we talked about it a while back, on April 9th. (Click HERE.)
 
If you read the quote above carefully, you'll see that in the same breath, the author points out that those same middle class families "haven't been the ones to flourish during the recovery." So I have no idea why this guy thinks the middle class goosed home sales in any significant way, except that maybe he's not aware of the investment pool activity.

As a matter of fact, the article later points out that:

For people buying homes closer in value to the national median price, the U.S. the housing recovery hasn’t been as straightforward. With prices rising at the fastest pace in seven years and the average mortgage rate about a percentage point higher than the 3.35 percent seen in early May, affordability has dropped for four consecutive months, according to an index from the Realtors’ association.

...which more or less backs up what I've just claimed regarding the "housing recovery." It's not the middle class that's behind it.

The really relevant point, although it's not quite the point the author intends, comes here:

The $1-million-and-up end of the market usually lags behind the cycles of the broader market because real estate purchases by wealthier buyers “tend to be discretionary spending” that can wait until economic conditions are right, Wachter said. Those homeowners can usually hang onto properties during tough times, and their houses are big enough for them to stay even if their families expand.

“These usually are people who can weather any storm,” Wachter said.

The last sentence contains the seed of truth that we can plant in our own gardens and actually learn a valuable lesson. It's that people who are smart focus on values. Notice I said people who are smart, not necessarily "rich." There are plenty of dumb rich people who spend like drunken sailors and buy things when they're overpriced - most especially those who come into money and want to show off how much money they have (the so-called "nouveau riche"). What's relevant to us here is that smart people wait to spend until they perceive that there's good value to be had for the buck.

Of course, if you have very little money and are in hock up to your ears, you can't play this "smart" person's game of wait and see until values show up. Then again, if you have little money and are in hock up to your ears, chances are you're not all that smart to begin with. (It's not that you have little money that makes you dumb; that can be the case depending on circumstance. It's the combination of little money and lots of debt: unless there's some emergency - a matter of life and death - that caused you to get into hock when you have no money, you have no business being in debt if you don't have much money to start.)

How about we all learn something valuable here, rather than just critique this article. Try to get yourself in the position where you don't need to make money. Have some money for investing, but wait until you see a bargain before you spend that money. It's not rocket science. simple common sense, isn't it? But hardly anyone really does this.

So it's really not the point that these people are buying $1 million homes or even that they're rich that's important. It's that they save their money and understand "value" when they see it.