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3 Reasons the Luxury Housing Market Is Sizzling

An $88 million condo sale in Manhattan? A palatial California mansion on the market for $79 million?

Given the still-sluggish state of the global economy, it’s hard to believe people would plunk down tens of millions of dollars for a roof over their heads in this day and age.

But that’s just what’s happening in some of the nation’s most competitive and sought-after housing markets. Sales of super high-end properties are booming, experts say, with the tight supply of desirable properties spurring multiple offers and bidding up sale prices.

“What we’ve seen is a lot of trophy sales—unique, extremely high-end properties,” says Jonathan Miller, president of New York City-based Miller Samuel Real Estate Appraisers. “And it’s not just the price point that’s unique—these aren’t cookie cutter transactions.”

So what’s driving the uptick in mega-million mansion sales? A lot of factors are at play—U.S. News talked to the experts to find out what’s behind the sizzling luxury housing market:

Turmoil in Europe. To be sure, the United States has its fair share of political and economic turmoil, especially with a presidential election around the corner. Nevertheless, the U.S. is seen as comparatively safer by high net-worth individuals.

“[The luxury market] is clearly driven by foreign interest, financial-services types, Fortune 500 executives,” Miller says. “They’re looking at New York City, for example, as a safe haven.”

Global financial markets have been thrown into chaos due to the instability in Europe and elsewhere, and while the American real estate market is by no means the cash cow it once was, some investors see it as the next best option to stashing money in low-yielding bonds.

If throwing money into a shaky-at-best housing market still seems like financial suicide to you, Miller equates the flood of interest into high-end real estate with the reaction of investors following Standard & Poor’s downgrade of U.S. debt. Even with the negative outlook following the political fiasco over raising the debt ceiling, investors continued to flood into U.S. treasuries, driving rates of return lower.

“Think of everything going on in Europe and the transfer of power in Russia,” Miller says. “We’re seeing news headlines of political stalemates and all the problems economically and yet we’re still perceived as a relatively safer [environment].”

Paul Bishop, vice president of research at the National Association of Realtors, agrees. “Foreign buyers are very active [in the investment segment of the market] for many of the same reasons domestic buyers are,” Bishop says. “But also, assets in the U.S., including real estate, look pretty appealing as opposed to other parts of the world.”

Financial flexibility. When a buyer is considering purchasing a multimillion-dollar home, chances are he or she has a little pocket change on hand, offering an alternative to navigating the tight mortgage market or at least a short cut.

“What’s defining housing nationally is that in virtually every market there’s tight credit,” Miller says. “That’s defining what’s selling and what isn’t.”

Those on the higher end of the real estate market can most likely afford to put down more up front, making it easier to secure mortgage financing. In some cases they can avoid the process altogether by paying cash and buying the property outright.

“Mortgage isn’t in their vocabulary,” Miller says of some affluent buyers. “They are unencumbered and untethered to the mortgage issue and don’t have to face what everyday buyers do.”

Still, the specter of both rising interest rates and home prices could be pushing some high-end house hunters to seal the deal. Although property values continue to sink nationally, many markets are actually seeing prices go up.

“There’s a sentiment throughout the market when you hit bottom of, ‘How long are you going to be at the bottom?'” says Mike Litzner, owner of Century 21 American Homes, which serves Long Island and the New York metropolitan area. “That’s moving some [would-be buyers] from the sidelines and getting them into the game.”

Perception of value. Even at the tippy-top of the real estate market, buyers still want to save a million here or there if they can. That means those who have been considering purchasing might have held off for prices to fall further.

Now that prices have more or less bottomed out, at least according to some experts, buyers are pouncing. Add in rock-bottom mortgage interest rates and it brings “affordability into more favorable territory,” Bishop says.

“All segments of the market have seen declines in prices, including the luxury market,” Bishop adds. “Even if you’re in [the luxury market segment], prices are lower than they were three, four, five years ago.”

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