The Great American Divide

By Alain Pinel
General Manager of Intero Prestigio international
Intero Real Estate Services, Inc.

We are alright, I swear. Don’t let the title scare you. I don’t mean to suggest that something earthshaking happened such that life will never be the same. In fact, I am not even going to tell you something you don’t know, although we surely don’t spend enough time thinking about it or figuring what the consequences might be going forward.

What I am referring to is the huge price gap that exists in the US residential real estate landscape in between regions. If you were to color-mark a map of the country according to real estate values, you probably would only need two markers to identify two very distinct real estate markets: one color for the 2 coasts, and the other color for almost everything in between.

What I mean is that the vast majority of the multi-million dollar homes and residential lots are today concentrated along the West Coast and the East Coast. The phenomenon is not new, but it is growing. Case in point: the 10 most expensive zip codes are all on the coast. Two States seem to “own” the high-end of the high-end: California and New York. The other coastal states are not too far behind.

Same picture when you stretch the list to the top 20 or even 50 priciest areas. Sure a few exceptions would surface, such as resort towns in Colorado or a few select neighborhoods in large cities, but the lion-share of the trophy homes are located in those towns whose names are now familiar: Atherton, Sagaponack, Alpine, Hillsborough, Beverly Hills, a handful of New York zips, Montecito, Water Mill, Malibu, Rolling Hills, Rancho Santa Fe, etc.

In those regions, the real estate market goes up and down just like everywhere else, but, when it takes a hit and prices go down, it does not last as long as most other regions; and when it goes up, prices soar a lot quicker. There are many reasons for the above. Some are “old” and some are new.

Obviously the weight of production & manufacturing in our economy has been (and is) shrinking year after year, while new industries and services are flourishing. Some regions and States, suffering from what we may call economic obsolescence, are able to reinvent themselves, find a new “specialty,” effect a reconversion of sort and successfully use marketing to bring home people and money.

Others have a hard time finding their economic eureka and the cycle of unemployment/low-wage jobs/underwater homeowners and distressed sales, is a tough one to stop or even slow. If, as it is the case in many countries, the power in place could distribute the marbles somewhat equitably between regions to keep some from bleeding, it would be one thing, but under the rules of federalism, it’s every State for itself.

Of course a lot of homeowners and aspiring buyers in areas where prices are low see this as a blessing. It absolutely is. Many of the most beautiful towns & villages are very affordable. All good when these real estate markets are healthy and even vibrant, but watch out if & when the trend goes the other way, causing equities to dwindle due to a lack of interested and qualified buyers. Urban areas looking for revival are particularly affected by the supply & demand dichotomy.

Money attracts money. Money attracts people and businesses. The “Tale of Two Cities” syndrome is a long story getting longer. Today, whether we like it or not, most leading corporations are somewhere on the coast. Most leading innovative industries are making roots on the coast. Most high-paid jobs are concentrated there. Most leading universities are there as well, close to economic hubs. The bridge education/jobs has never been so short.

Another factor which has a considerable impact on the regionalization of high-priced homes is the consequence of the growing demand for US real estate from foreign nationals. More and more foreigners, investors or simple home-buyers coming from China, India, the Middle-East, Europe… are grabbing the most desirable real estate they can find here, to protect their money. They want the easy commuting access the two coasts offer.

At this point, global demand for multi-million dollar homes represents roughly half the sales. No reason to believe that this will slow down. Quite the opposite. Last year, prices in the Silicon Valley jumped over 20%, “thanks” in part to those cash buyers coming from afar. New York was a lot slower for a change, but prices still managed to grind another 5% or so.

Is that spiral likely to last? Probably so. After all, our prices, however extravagant they may seem, are still low compared to international standards!

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