Another way to use this curve is to think about the market dynamics and how the values change as market sentiment changes whether the market is in a hot market or a little more conservative.
In a hot market, the higher end of the curve includes luxury properties and new construction, with prices continually pushing higher. This trend is driven by significant capital investment in these properties. New constructions are being built larger and more luxurious than before, while older properties undergo extensive renovations, adding high-end features such as additional bathrooms, premium kitchens, and luxury appliances. These enhancements increase the overall capital invested in the market, thereby raising property values.
As a result, in a hot market, more properties appear on the steeper end of the curve. Even within the flatter portion of the curve, properties are moving to the right, becoming more expensive as capital influx continues to have an impact. This upward shift in property values is not simply due to price inflation but to the substantial improvements and investments being made in these properties.
Conversely, at the lower end of the curve, lower-priced, poorer-condition homes, including the tragically flawed, are often torn down and replaced with high-end properties. This replacement contributes to the overall rise in home prices. However, this increase does not mean that an individual home’s value rises directly with the median price. Instead, the median price reflects a shift in the inventory, with properties becoming generally more expensive and luxurious.
TLDR; in a hot market, property values increase due to significant capital investment and the continuous improvement and replacement of homes, rather than just price inflation.
When market sentiment turns conservative, several key dynamics emerge. At the luxury end of the curve, the assumption that median prices dropping by 30 percent means significant losses for high-end property owners is often inaccurate. A decrease in median price typically reflects changes in the types of properties available rather than a direct loss in value for luxury homes.
In a conservative market, new construction at the very high end ceases. Developers are not building large, luxurious homes, and existing properties are not undergoing high-end renovations. Additionally, owners of truly luxurious properties, such as waterfront mansions or homes on the best streets, are generally not selling. As a result, the inventory of the highest-priced homes diminishes; there is simply less available at the top of the market.
This shift does not mean that high-end properties are available at a discount. Rather, it indicates that these properties have been withdrawn from the market. The reduction in median price reflects the absence of these high-end properties from the inventory. Meanwhile, lower-end, tragically flawed houses remain on the market, sold as is, without being replaced or upgraded. Mid-range properties are also less likely to be renovated during conservative market periods.
Consequently, the median of the available inventory is lower in value compared to previous periods. This change in median price does not signify that the value of individual properties has decreased. Instead, the overall quality of available properties has declined. A median house from a previous period might now be considered above average and retain or even increase in value despite the apparent drop in median prices.
Our goal is to help clients identify and invest in properties that maintain their value, remain highly desirable, and are liquid in any market condition. These gems are the key to sustaining long-term value and ensuring a sound investment.