Cheap Chic: Home-Price Erosion Hits the $5 Million-Plus Market

A slice of good life, the really good life, has gotten a lot more affordable lately

(Barrons) -- From Miami to Beverly Hills, homes with bowling alleys, theaters, steam rooms, heated decks, six-bay garages and other luxury must-haves are sitting on the market for at least twice as long as they did a year ago, and many sellers are doing what was, until recently, unthinkable: slashing prices. "Sellers are listening to offers they wouldn't have considered before," says Anita Bigelman, a broker/owner at Harding Realty in Miami. "We just sold a house for $10.5 million that was listed for $12 million. Before, that would have never happened."

After seeming impervious to the main market's woes of the past two years, homes in the $5 million-plus market have come down an estimated 10% to 15% in the past two quarters, and they are likely to shed another 10% or more over the next 12 months, according to Housing Predictor, a Destin, Fla., company that crunches data on 250 U.S. regions. "The high-end market is the fortress of the real-estate asset class, and the inner sanctum has been breached," says David Darst, chief investment strategist at Morgan Stanley.

The homes featured in this story give a sense of just how far your real-estate dollar will go now at various pricing levels from $5 million to more than $50 million. You'll clearly get more than you would have even a few months ago, but with some further price declines likely, bargain hunters will want to proceed with caution.

It's not surprising that the top-tier market, which represents a fraction of 1% of the total U.S. residential market, had seemed insulated for so long. The majority of buyers in the $5 million-plus market generally aren't directly affected by credit conditions, which are to blame for sending prices in the broader market down by more than 25% in some areas the past two years. Indeed, buyers in the upper reaches typically have net worths of at least $10 million to $20 million and tend to pay for homes in cash, says Gibran Nicholas, CEO and founder of Nicholas & Co. Mortgage Planners in Ann Arbor, Mich.

But the prolonged decline in property prices in the broad market, combined with escalating layoffs in the financial-services sector and concerns about the direction of the stock market and the economy, has changed the psychology at the top of the real-estate market, Darst says. Some markets, such as Florida, Southern California, Phoenix and Las Vegas, already have seen luxury-home prices fall by 15% to 20% in the last year or two.