If the Metroplex luxury home market is headed for a slump, it wasn’t evident at the recent groundbreaking of a $10 million, 14,000-square-foot showcase estate in Preston Hollow.
The mansion is one of 17 planned for the Creeks of Preston Hollow, a gated community Hillwood Residential is developing on 22 acres the company bought from telecom billionaire Kenny Troutt. Home prices will start at $5 million.
So far, the Dallas-Fort Worth luxury home market has stayed strong, while lower-priced markets have suffered as a credit crunch started by defaults on subprime loans has gripped the nation. But some signs suggest the high-end market has begun deteriorating as well. If it continues to do so, it will exacerbate a housing crisis that ultimately could erode consumer confidence, making a recession more likely.
Already, foreclosures of $500,000-plus homes in Dallas-Fort Worth are rising. Inventories have climbed for new and pre-owned luxury homes, especially in the suburbs. And housing starts for expensive speculative homes are down.
On the other hand, real estate agents say, existing expensive homes are selling as well as ever in neighborhoods such as Highland Park, University Park and Preston Hollow. And luxury home prices in most parts of the Metroplex have climbed or at least held steady, unlike other parts of the country where prices have dropped.
Year-to-date foreclosure postings for Metroplex homes worth more than $1 million are up 66%, totaling 63 so far in 2007, compared with 38 during the same period of 2006, according to the Addison-based Foreclosure Listing Service. Foreclosure postings for homes worth $500,000 to $1 million jumped 51% year-to-date, increasing to 414 so far in 2007, from 274 in the same period in 2006. The listings include homes in Dallas, Tarrant, Collin and Denton counties.
“The substantial increase shows that, all in all, this foreclosure bug is affecting everybody and not just a segment of the real estate community,” said George Roddy, FLS president.
Roddy points out, however, that luxury homes account for a small percentage of foreclosures. Fewer than 2% of the 31,158 homes posted for foreclosure so far this year are worth more than $500,000.
Foreclosures hit high-end homes later in the cycle because luxury home owners usually have money to postpone foreclosure, at least initially, when problems such as job loss or divorce arise, he said. Owners of expensive homes don’t rely on subprime loans for financing, but they’re no less susceptible to buying more house than they can afford, Roddy said.
He expects foreclosure listings on expensive homes to continue to rise.
“It’s simply the same concept as the lower-priced homes,” he said. “People have gotten into them when they shouldn’t have. They’ve overborrowed for the property or overborrowed for their income.”
In addition, Roddy said, higher interest rates and tighter lending standards for jumbo mortgages, or home loans that exceed $417,000, are hurting buyers’ ability to finance expensive homes.
Jumbo loans, like subprimes and most other mortgages, are typically bundled by lenders, then resold to investors as mortgage-backed securities. But jumbos, by law, are not guaranteed by the government-chartered mortgage finance companies Fannie Mae and Freddie Mac, which Congress created to promote home ownership for people with low and moderate incomes.
When rising defaults on subprime mortgages revealed how lax the lending standards for those loans had become, investors stopped buying all mortgages not backed by Fannie Mae or Freddie Mac. When the secondary market for mortgages dried up, lenders cut back on jumbo loans and increased interest rates for those they do provide.
‘Feeling the pinch’
Meantime, the inventory of high-priced, speculative homes on the market is high, said Ted Wilson of Dallas-based Residential Strategies Inc.
“The upper price points are now feeling the pinch of the market slowdown,” Wilson said.
A 5.2-month supply of finished vacant homes priced more than $500,000 is on the market, RSI statistics show. The inventory is more than twice the ideal of a two-month supply.
A four-month inventory is on the market for homes priced $300,000 to $500,000, and a three-month supply exists in the $200,000 to $300,000 range.
There are 290 finished, vacant houses worth more than $500,000 in the Dallas teardown market, which includes University Park, Highland Park, Preston Hollow and other wealthy, built-out neighborhoods, Wilson said. That represents a five-month supply. At this time last year, 148 finished homes stood vacant in teardown neighborhoods, representing a 3.5-month supply.
In the Dallas-Fort Worth suburbs, there are 890 finished, vacant, $500,000-plus houses, which is a 5.2-month supply. That’s up from 581 homes, a 3.5-month supply, at this time last year.
For the 12 months ending June 30, there were 2,154 housing starts and 2,067 closings on $500,000-plus homes in the suburbs, Wilson added. There were 843 starts and 692 closings in teardown markets, he said.
High-end builders have cut back on new construction in the past two quarters, so inventories should begin to drop soon, Wilson said.
The good news for builders is that prices haven’t fallen significantly, as they have in California, Florida and other areas that saw rapid appreciation in recent years, Wilson said. Because D-FW housing values never soared, the area is less likely to see prices collapse, he said.
On the down side, builders that traditionally put up low and moderately priced homes have shifted into the high-end market to escape collapsing demand triggered by the subprime meltdown, he said.
“There’s been a migration to the higher price points,” Wilson said. “We’ve seen the builders really move from one side of the ship to the other, and the yields per neighborhood at the higher price points have been disappointing. It’s a fully exploited market from the builder and developer standpoint.”
$2 million threshold
Still, sales of pre-owned luxury homes remain strong.
Year-to-date sales of pre-owned, single-family homes priced at more than $1 million in North Texas totaled 579 through July, compared with 470 in the same period last year, according to the North Texas Real Estate Information System.
Active listings in the $1-million-plus category are up, too, totaling 1,330 homes on the market on July 31, compared with 1,011 on the same date last year, NTREIS data shows.
Erin Mathews, a top producer and senior vice president at Briggs Freeman Real Estate brokerage, said homes are selling faster than ever in Dallas’ most exclusive neighborhoods.
“Our market is just consistently good,” she said.
Mathews, who focuses on Highland Park, University Park, Preston Hollow and Greenway Parks, said she has sold 22 homes priced at more than $1 million so far this year, including six sales above $4 million. That compares to 12 homes worth more than $1 million at this time last year, and 26 in all of 2006.
The super-rich buyers Mathews works with aren’t worried about jumbo loans because most pay cash, she said. Nor are they worried about recent volatility in the stock market.
“I don’t sense that my buyers are feeling that things are precarious,” Mathews said.
While a $1 million price tag was considered the benchmark in Dallas’ luxury market five years ago, the threshold has risen to at least $2 million, Mathews said. Sales prices topping $5 million are no longer a rarity, she said. A $1 million house in Highland Park is often a candidate for a teardown today, she said.
The most expensive home currently on the market is a 29,000-square-footer on a 9-acre estate in the heart of Old Preston Hollow, Mathews said. Its asking price: $45 million.
Sales are a little slower in the suburbs, said Donna Trayler, a top producer with Keller Williams Realty. Trayler, who specializes in the suburbs north of Interstate 635, said she has sold 18 houses priced at more than $1 million so far this year.
“They’re selling in that million-dollar range,” she said. “They’re just taking a little longer.”
There are 74 houses on the market for more than $1 million in Plano, and 32 houses in that category have sold in the past six months, she said.
In Frisco, 131 listings top $1 million, including 23 with a price tag of more than $2 million. Only 24 Frisco homes have sold for more than $1 million in the past six months, she said.
CEO buyers
Meanwhile, back at the Creeks of Preston Hollow, the mood was upbeat Aug. 23 as builders and Hillwood officials, including Ross Perot Jr., pulled out the golden groundbreaking shovels.
The showcase home, an Italian Villa, will have six bedrooms, seven full baths, three half-baths, five fireplaces, a two-story library and an eight-car underground garage. It will have an entertainment wing with home theater, billiard room and golf simulator room, wine grotto, subterranean courtyard, spa and fitness facilities.
Fourteen of the development’s 17 lots, priced at $1.6 million to $3.9 million, are under contract to builders. Builders have sold three to homeowners. All three buyers are CEOs.
Fred Balda, president of Hillwood Residential, said he expects strong demand for the $5-million-and-up homes. The teardown trend shows heavy demand for new housing in Dallas’ most expensive areas, he said.
“This price point so far hasn’t really been impacted like the production-volume builders have been,” he said. “We don’t take anything for granted. It’s still a challenging market. But at the same time, in this location, with this quality of neighborhood, you’re seeing a flight to quality.”
Roddy said he expects homes in the Creeks at Preston Hollow to sell. The difference between the rich and the super-rich is as clear as the difference between a $750,000 house and a $5 million estate, he said.
“You really jump to a different classification of homeowner there,” he said. “There’s always a handful of people who don’t have any economic issues. It’s an interesting time to be starting construction on $5 million houses, but it may not be a bad idea.”