The important role that residential real estate plays in the Coachella Valley’s economy cannot be overstated. The sale of residential property provides the livelihood for thousands of real estate professionals in the desert; it spawns a wealth of corollary professional services such as title and escrow companies; it represents a source of tax revenue that is a critical bedrock for city budgets. While the frenzied activity in foreclosures and bargain hunting at the residential market’s lower price strata receives its share of ink in the press, the complexities and subtleties of the high-end market are rarely discussed.

The Public Record recently met with three industry standouts representing more than 60 years real estate experience, each with particular expertise in luxury residential property, to discuss the factors influencing the luxury real estate market, the results of the past three tumultuous years, and the outlook and opportunities on the road ahead.

While the high-end market is defined for the purposes of this article as homes valued at $1 million and above, it can be useful for discussion to divide this segment into two pieces: $1 million to $3 million properties, and properties valued over $3 million, says Bruce Blomgren, an Executive Premier Director for Windermere Real Estate’s Luxury Homes and Estates Division. One of the desert’s best known and most respected brokers, Blomgren has three decades of real estate experience, and has been responsible for more than $675 million in real estate
transactions over the past 12 years. “The consumer tends to assume that there are a huge number of high end property sales here in the valley,” says Blomgren. “That is not really the case. The Coachella Valley market tends to cap out at around $5 million.

Currently, there are just 90 houses over $3 million on the market. Only 20 homes above $3 million have been sold since the first of the year. Of these, just four were not in country club communities.”

Buyers at this highest level are interested in more than just the property, according to Blomgren. “They are buying the lifestyle of the community, and they want to be surrounded by other valuable homes,” he says. Bighorn has perhaps the strongest allure of the desert’s high end golf course communities, with the Reserve, Hideaway, and Tradition also strong. For buyers with cash the deals available are remarkable, with homes selling for well below replacement cost.

Moving down into the $1 million to $3 million bracket expands the market considerably. Currently, there are 438 properties listed in this range, says Blomgren, who adds that this is a preseason number likely to grow. “By November 1, that inventory will probably increase by 20 to 30 percent, as sellers who don’t need to have houses on the market over the summer relist their homes.” Blomgren estimates that, given current absorption rates, there is about two years worth of inventory in real world terms, double the inventory of 4 years ago. That said, 250 houses in this price range have sold and closed escrow since January 1 – certainly a fairly impressive number.

– While the high-end market has experienced a slowdown similar to other segments of the market, it is influenced by different factors, the result of its buyers’ unique demographics, says Brad Schmett, a broker with ten years of experience focusing on La Quinta’s luxury residential real estate market. Schmett was broker/owner of his own successful La Quinta-based boutique
real estate brokerage before playing an instrumental role in launching the La Quinta office for Luxury Homes by Keller Williams in 2008. “Absorption at the lower end of the market is much greater,” says Schmett. “As you go up in price, inventory (relatively) tends to expand and absorption tends to slow. The reason is simply that the pool of buyers who can afford these properties shrinks as the price tag grows.”

Buyers in the higher end of the market differ from low and mid-range buyers in several fundamental ways, says Schmett. For one thing, a large percentage of them come from outside the Coachella Valley. Half of Schmett’s clientele comes from the greater southland, within driving distance of the valley. An additional 30 percent come from the Western Seaboard, the Sunbelt and Canada, he says. Because Coachella Valley real estate purchases for these buyers are purely discretionary, the recovery of the desert’s market is tied to the recovery of those regions.

The industry must also confront a paradigm shift in these discretionary buyers’ attitudes toward large purchases in general and real estate in particular. “People are afraid to get back into this market,” says Janine Stevens, a real estate professional specializing in the luxury market since 1989. Stevens has been named a top-producing agent in each year of her career, and is one of the top sellers of property in La Quinta. “During the boom, real estate was the thing to buy. Now, even though we recognize how favorable the market is for buyers, particularly for investors with cash, there is much more of an atmosphere of caution.”

Even for those less cautious buyers, Schmett points out that “there is so much negative equity out there that people are unable to pull equity from their homes to take advantage of this buyer’s market.” Stevens cites the move up buyer market as one hit particularly hard, with the difficulty of selling their existing homes creating an inventory tangle that makes new purchases difficult. “These buyers can’t move up, or down for that matter, because it is hard to sell their current
homes. Everything is about pricing – if a seller isn’t realistic about what their home is currently worth, that property isn’t going to sell.” Unfortunately, points out Blomgren, move up buyers locked into their current homes are in a great position to profit from current market conditions.
“If a buyer discounts his $1 million home to $800,000 and sells it, he may then be in a position to buy a home that is listed at $1.1 million marked down from $1.5 million. But many sellers are still stuck in the mindset of 2007 pricing.”

Prices in the high end market have in some cases dropped as much as 60 percent from their peak in 2007, says Schmett, in part the result of foreclosures and distressed properties driving prices down. Stevens, who has a great deal of experience in the Madison Club and the Hideaway, identifies the spec builders as one of the primary sources of foreclosures. “If you look at the foreclosures on the luxury market, a very high percentage of them are spec homes,” she says. The inventory of properties at the Madison Club versus the Hideaway and the Tradition tell the story, according to Stevens. “The Hideaway and Tradition, which came along eight years ago when the market was going crazy, have a large inventory of properties on the market. The Madison Club, which started just three years ago when the market was already slowing, has almost no inventory – no one went there to build spec homes.” Stevens sees spec building proceeding at a very slow pace, as financing difficulty and fear keep builders from adding to an inventory already burdened with distressed property. Of the 250 $1 million-plus homes sold in the first 9 months of the year, Blomgren estimates that approximately 75 were bank owned, short sales, or sellers in trouble. Distressed property, he says, creates a situation where the rest of the market needs to change pricing strategy in order to be competitive. “Seller motivation is a major factor,” he says. “Obviously, banks are very motivated. It is rare for a bank property to last 60 days on the market, because they are priced so competitively. The rest of the market needs to compete with that.”

What is undoubtedly true is that, by almost any measure, buyers who are willing to pull the trigger are in an environment with some astounding opportunities for value. The combination of drastic price reductions and historically low interest rates mean that $1 million is buying more home than it has bought in arguably a decade. When the current uncertainty of the stock market and low yield of investments is factored in, moving money into real estate seems that much more attractive, particularly for cash rich buyers. The problem is that this very uncertainty has made credit more difficult to obtain, has reduced discretionary wealth, and, perhaps most importantly, has created a psychology of caution in the minds of would be buyers. “Particularly for a high end discretionary purchase, the motivation to buy has to come from somewhere,” says Blomgren. “In the boom, that motivation was easy to find. Now buyers need a great deal in
order to motivate them.”

Additional motivation will come as more certainty returns to the economy, and as the desert’s high-end inventory begins to shrink. Because there are very few new homes being built, says Stevens, when that inventory is diminished in two to three years time, there could be very few luxury homes on the market.

Attempting to time the real estate market is almost always a mistake. While values may still soften a bit, it is clear that opportunities abound for the real estate investor, or for buyers interested in purchasing more home than they thought possible with their discretionary dollars.
“With prices so low, and interest rates so competitive, buying property now is almost like getting in on the ground floor of a great stock,” says Schmett. The decision to open a luxury division for Keller Williams, and the commitment to developing the luxury business here in the desert, shows the confidence Schmett has in the Coachella Valley, a confidence shared by Blomgren and Stevens.

“Home values will fluctuate just like stock prices fluctuate,” says Blomgren. “And while an investment in real estate may not be liquid, a purchase now would have some stability. And even if prices fall a bit, you have potential tax benefits, and a property you can use and enjoy. That has much more value that money sitting in a CD.”