When high-end markets plummet: What it means for you

I think most real estate pros would agree that the recent run up in prices in many areas throughout the country is concerning. Are there leading indicators of what could be to come?

How are high end markets doing? Aspen is down 42 percent from last year! This isn’t just affecting Aspen but also other ultra-high end markets. The Hamptons are down 48 percent and Telluride is down 33 percent. Is the sky falling? What does this mean? Are we in for another wild real estate cycle? Can this indicate pain to come for the rest of the economy?

If we look at the last cycle, we saw that in more expensive markets the real estate pullback started well before the rest of the country. Aspen is the epitome of the ultra-luxury market with an average home price of $7 million, which is why it is important to take note of the market trends occurring here. The latest market data show Aspen down 42 percent from last year (see Denver post article). Is this unique to just Aspen?

After seeing the news in Aspen, I looked at other ultra-high end markets such as Telluride and the Hamptons. I found Telluride is down and the Hamptons are also down considerably along with Vail and other high end markets throughout the country. When I see this many ultra-high end markets struggling this is likely not just coincidence but an indicator of things to come.

If we study the last cycle, the ultra-wealthy saw the writing on the wall of the imminent downturn before the rest of America and began taking steps to protect themselves months before everyone else. With the wealthy pulling back, is this a precursor of the next cycle? Most economists believe there will be some sort of a pullback in 2017 or 2018 (see CNN article) regardless of who wins the presidency.

What is causing Aspen, Telluride, the Hamptons and others to decline? Unfortunately, nobody knows the true reason since the purchases in the high end markets are purely discretionary (sorry to say nobody really “needs” a $7 million house with leather on the walls). So in any cycle discretionary purchases are cut first.

 Here are four factors I see influencing the sharp drop off in sales in these markets:

1. Global uncertainty. The list is very long from China to Brexit to possible trade wars and everything in between
2. Turbulence in financial markets: exchange rates, etc.. scaring off foreign buyers/investors
3. Oil: Substantial wealth in the US was wiped out from the oil collapse that may never come back
4. Election: The US election is the most contentious in recent memory regardless of which part of the aisle you sit on the policies of the next president could be a game changer for taxes, trade deals, immigration, etc.

Unfortunately, I only see one of the four factors above (the election) getting resolved in the near term.

What does this mean for other markets?

Depending on the economic theory you buy into (trickle down or trickle up economics) will influence what the impact to other markets will be. Personally, I think that as the ultra-wealthy pull back their spending (or lack thereof) it will ultimately trickle down through the rest of the economy.

For example, if buyers are pulling back from the Aspen market, are they also delaying other discretionary purchases (cars, boats, etc.? The nosedive in Aspen and other high end markets is invariably a precursor of things to come for the general economy. The only question is when this will “trickle” through the rest of the economy and how badly will it end.