Sluggish property market
Not all luxury property owners live in these mansions full-time. They can be second homes, vacation spots or even investment properties that, at one point in time, were a good addition to an extensive real estate portfolio.
“A lot of owners took on homes and mortgages and extra vacation homes when lending criteria was easier,” Patrick Michael, founder and CEO of LA Estate Rentals, told Bloomberg.
Michael added he has seen a surge in luxury rentals in recent months.
“I feel like everybody’s in panic mode now. Even wealthy owners are asking if I have anybody for their house.”
Just like the rest of the country, the L.A. housing market has been sluggish in recent months as prospective buyers grapple with elevated borrowing costs and house prices.
Home sales in L.A. were down 26.6% from January through September 2023 compared to the same period a year ago, according to Bloomberg, citing data from appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate.
Luxury home listings — with a median price of $13.25 million — have been particularly slow to sell, sitting on the market twice as long as the average single-family home.
Part of the problem is that even the mega-rich don’t want to pay taxes, home insurance and maintenance bills for mansions they no longer need and can’t easily sell. They also don’t want to walk away from low-interest mortgages at a time when borrowing costs have soared, so finding a renter is a great way to keep their options open.
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Pain points for wealthy sellers
One issue unique to wealthy property owners in L.A. is the so-called “mansion tax” — officially called “Measure ULA” — which came into effect on April 1.
Any L.A. properties that sell for over $5 million are subject to this special transfer tax above and beyond the base transfer tax paid at the final stages of a real estate deal. For sales of at least $5 million, the additional “mansion tax” is 4%, and for sales of $10 million or more, the extra tax is 5.5%.
This tax has complicated matters for sellers as they effectively lose an extra chunk of money on the transaction. It has spurred some ultra-rich homeowners to seek other ways to monetize their high-priced properties, for instance, by renting them out for staggering sums.
But owners even struggle in the rental market, thanks in part to the recently ended Hollywood labor strikes. Stalled productions resulted in high-priced properties no longer being rented for shoots, and there were fewer out-of-town actors, directors and producers demanding luxury living quarters.
“Because of the strikes, that well dried up,” Zach Goldsmith of The Agency real estate brokerage told Bloomberg.
Finally, high borrowing costs continue to sideline potential buyers, even in the luxury market, at least for the time being.
Granted, multimillionaires are often shielded from mortgage rate trends because they don’t typically borrow money (at least from a traditional mortgage lender) to buy luxury homes. They may be able to buy in cash or to sell and leverage existing properties in their real estate portfolio to seal a new deal.
Still, unfavorable market conditions have led some wealthy homeowners to put a pin in their plans.
Waiting out the storm
It’s easy to see why someone like DeSantis, who seemingly has no urgent financial need to sell his Manhattan Beach mansion, is holding onto his property and leasing it instead.
“People who can afford to lease are probably people who can afford to buy,” DeSantis said. “I learned long ago: Everything has a price. If someone offered me $1 billion now, the answer is definitely ‘Yes.’ If they offer $90 million, it’s a definite ‘No.’”
The property was listed at a sale price of $150 million, according to the Wall Street Journal. It was built over three adjacent lots that DeSantis says he purchased for $13 million in 2000. Construction was completed in 2009.
The Institute for Luxury Home Marketing (ILHM) says Americans who need to buy or sell their luxury homes will continue to do so, despite the market conditions. But those who simply “want” to buy may continue to be hesitant until inventory increases, prices come down and mortgage rates trend downward.
“Equally, sellers will remain resistant, not just because they do not want to give up their current low mortgage rates, but because they see little inventory to purchase and therefore less reason to lower their prices,” the group wrote in its November 2023 Luxury Market Report.
Nonetheless, there is still confidence in luxury real estate as an investment and still belief in the stability of owning property.
“Even if some buyers previously dropped out of the real estate game due to fatigue, frustration, or even hesitation during 2023, in 2024 they may be primed to return as inventory levels improve,” the ILHM predicted.
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