California Luxury Homes Holding Their Value

By Brad Finkelstein

SAN FRANCISCO-Luxury home prices declined modestly in Los Angeles and San Francisco in the fourth quarter but rose year-over-year, while values in the San Diego area posted small decreases in the fourth quarter compared to a year ago, according to the First Republic Prestige Home Index.

This index is compiled by First Republic Bank here, a provider of private banking, private business banking and wealth management services.

“Luxury home prices in California weakened in the fourth quarter, but they are holding their own on a year-over-year basis,” said Katherine August-deWilde, president and chief operating officer of First Republic Bank. “At the high end of the luxury market, demand remains quite strong, while buyers at the lower end are being more selective. Overall, prices in Los Angeles, San Francisco and San Diego have remained firm due to a lack of inventory and the desirability of luxury neighborhoods.”

Values in the Los Angeles area are down from a high of $2.46 million in the second quarter of 2007 to $2.4 million at the end of 2007. The 1.2% decline in the fourth quarter of 2007 was the region’s second consecutive quarterly drop. In December 2006, the average value of a luxury home in the Los Angeles area was $2.35 million.

On the West Side, the higher end of the luxury market remained strong. In 2007, the number of home sales over $5 million totaled 261, up from 211 in 2006, according to Joyce Flaherty of Coldwell Banker in the Beverly Hills South office. Sales in 2008 are already running ahead of last year’s pace. “People who have a tremendous amount of money don’t care about the market, and they’re buying,” Ms. Flaherty said. “As long as it is fairly priced, properties are selling. A $22 million property recently sold within a week.”

Anita Rich of Keller Williams in Sherman Oaks said that the lower end of the luxury market is holding up much better than it was two months ago. “People have realized that the bottom isn’t going to fall out,” Ms. Rich said. “More people are now focused on buying. I’m seeing more stability in the market, and I see attitudes improving among buyers and sellers.”

In Orange County, the market is also active, although inventory levels are modestly higher.

The current average home price in the San Diego area is $2.11 million, which means values are down from a high of $2.19 million in the second quarter of 2007. The 1.4% drop in the fourth quarter was the region’s second consecutive quarterly decline. In December 2006, the average luxury home was $2.15 million.

Despite the declines, some agents said the market has not fallen substantially. “We’re not seeing wholesale price reductions,” said Lucy Kelts, Prudential California Realty in Rancho Santa Fe. “If something is listed fairly, there is room to negotiate and make good deals. Inventory is also shrinking and builders are not breaking ground on any new projects. When the inventory levels out, buyers who have been waiting may not find a lot to choose from.”

In the San Francisco Bay Area, values decreased 1.7%, the first quarterly decline since the fourth quarter of 2006, when average luxury values were $2.92 million. The region’s luxury values surpassed the $3 million mark for the first time in the second quarter of 2007 and are now at $3.03 million. However, inventories are low for high-end properties in the City and parts of Marin and the Peninsula, where values remain strong.

Agents said demand for luxury homes remains high in San Francisco, even though values have softened in areas outside of the City. “The market is just very strong,” said Richard Weil of Hill & Co. in San Francisco. “We don’t have any inventory. It comes down to that.” He said homes between $3 million and $5 million are taking a little longer to sell, but demands for properties above $6 million have been largely unaffected by the downturn affecting the rest of the housing market.

First Republic Bank produces the Prestige Home Index each quarter with Fiserv CSW Inc., a leading provider of automated property valuation services and home price metrics to U.S. financial institutions. Historical results of the Index are accessible at http://www.firstrepublic.com/. The Index has tracked luxury homes since 1985.

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