Defining what makes for a luxury home

Here is how one data firm defines what it means to be a luxury housing unit:

Although upscale housing is selling better in some cities than in others, a monthly analysis by the Altos Research data firm for the Institute for Luxury Home Marketing says that overall, that segment of the market is gaining momentum and prices are rising…

Q: “Luxury home” is probably one of the most abused phrases in real estate-ese. How do you define it?

A: A price range that’s considered the high end of the market in one place might be something that’s average in another. So, “luxury” is local: Our organization generally defines it as the top 10 percent of an area’s sales in the past 12 months. But for the purposes of the research that we do with Altos for our monthly Luxury Market Report, we’ve taken the ZIP codes within each of 31 markets that have the highest median prices, and for about five years we’ve tracked the sales of homes in those (areas) that are $500,000 and above.

There are two techniques proposed here:

1. The highest 10 percent of a local housing market. Thus, the prices are all relative and the data is based on the highest end in each place. So, there could be some major differences in luxury prices across zip codes or metropolitan regions.

2. Breaking it down first by geography to the wealthiest places (so this is based on geographic clustering) and then setting a clear cut point at $500,000. In these wealthiest zip codes, wouldn’t most of the units be over $500,000? Why the 31 wealthiest markets and not 20 or 40?

Each of these approaches have strengths and weaknesses but I imagine the data here could change quite a bit based on what operationalization is utilized.

Interestingly, the firm found that luxury sales rebounded quicker than the rest of the market:

The interesting thing about this recovery is that the luxury segment, that group of affluent households, was able to recover fairly quickly. They shifted their assets around, and a lot of them were able to see opportunities in the down market. By 2010, there were almost as many high-end households as before the downturn, not just in the United States, but internationally, as well. This group focused on residential real estate as a pretty desirable asset — for them, a second or third home turned out to be a portfolio play.

This shouldn’t be too surprising – when an economic crisis hits, the wealthier members of society have more of a cushion. While the upper end is doing all right, others have argued the bottom end, those looking for starter homes, are having a tougher time.

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