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Hard Times In The Penthouse

John Kerry and Leonardo DiCaprio
Leonardo DiCaprio and Secretary of State John Kerry in 2016. Photo courtesy the U.S. Department of State.

People who buy homes at eight- or even nine-figure prices are not going to ask for charity any time soon, and neither are the people who sell those people their homes.

But times are still getting a little tougher in the penthouse.

Academy Award-winner Leonardo DiCaprio recently decided to shed some of his real estate, and he was willing to take a loss to do it. DiCaprio recently found a buyer for his Studio City, California house at about $150,000 shy of its asking price, according to Variety. DiCaprio also unloaded his Greenwich Village condo for $8 million – a $2 million loss compared to its 2014 purchase price, property records show. The actor is reportedly still trying to sell his oceanfront Malibu home.

DiCaprio shouldn’t feel too bad about his New York City loss. He is far from the only seller reduced to offering luxury real estate at a discount. Bloomberg recently reported that buyers at 432 Park Ave., the supertall residential skyscraper overlooking Central Park, saw price reductions averaging 10 percent this year. An 88th floor penthouse in the building sold for a 20 percent markdown from the price developers initially sought, and the full-floor penthouse on the 96th story sold at a substantial discount too.

Similar discounting was reported at other luxury buildings in Manhattan. And top-hat prices have taken a hit this year in other markets as well, from the Hamptons to Miami to London.

So does this mean we should start worrying about another crash in the value of homes that people of more modest means – meaning pretty much everyone – buy?

I don’t think so. While every market has its own particular mix of drivers, the things that lead someone to consider paying $10 million or $50 million for a dwelling are not major factors for most of us.

Take exchange rates, for example. The United States has the world’s strongest major economy right now. For most of us, that’s just a good thing, period. But it has made the dollar gain strength throughout the year, especially as we approach another likely boost in interest rates by the Federal Reserve this week.

For sellers of high-end real estate, a strong dollar is bad news because it makes their properties even more expensive for buyers whose natural currencies have names like pounds or euros or rubles or reals. These foreign buyers are major investors in top-end U.S. properties, often as much (or more) because they want a safe dollar-denominated asset in which to store their wealth as because they want a residence in which to store their art collections or gala-appropriate jewelry. As foreign buyers move to the sidelines, potential American customers face less competition and have greater bargaining power.

Foreigners have never been a major factor in real estate markets like Cleveland or Kansas City or even Philadelphia. So a strong dollar means much less in those places than in New York or Miami.

Some foreign buyers, too, are just not feeling as flush because of developments at home. Low oil prices have put a crimp on many Russian tycoons’ spending habits, while Brazil has struggled with a limping economy, along with political corruption scandals. Just a few years ago, buyers from these places were rushing to Miami and its surrounding beach cities. Not now.

In London, of course, the big concern is Brexit. The pound has declined drastically against the dollar this year, and more modestly against the euro, which should encourage foreigners to buy property in the United Kingdom. But this has been outweighed, at least in the short term, by uncertainty over how attractive Britain will remain for non-U.K. buyers after it leaves the European Union. My own guess is that Britain will be just fine, which may make this slowdown a pretty good buying opportunity for those who can take advantage. But my guess isn’t worth very much when it comes to purchasing London property.

Even if these top-end prices won’t affect most of our lives directly, the presence or absence of foreign buyers does have an impact on cities that millions of people call home. New towers get built – or not; service jobs to support those towers get created – or not; urban centers attract and expand multinational business headquarters, cultural institutions and sports venues – or not. All of these developments are influenced by whether a city can truly count itself on the international A-list.

So after a pretty strong recovery from the crash of nearly a decade ago, the party may be starting to wind down. At least in the penthouse with the $10 million view.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, The High Achiever’s Guide To Wealth. His contributions include Chapter 1, “Anyone Can Achieve Wealth,” and Chapter 19, “Assisting Aging Parents.” Larry was also among the authors of the firm’s previous book Looking Ahead: Life, Family, Wealth and Business After 55.

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