The Market For $5 Milllion Plus Homes Falls Apart

The price at which real estate is dropping may have slowed, but that is not helping the ultra-rich to stay in their homes. A study commissioned by The Wall Street Journal and carried out by RealtyTrac showed that 352 homes worth more than $5 million were scheduled for foreclosure in February. The number was 1,312 for all of 2009.

The obvious reason that the rich default late in a real estate crisis cycle is that they tend to have large bank accounts and big pools of assets. But, that may not explain the sharp rise in foreclosures on expensive residential properties.

Most wealthy homeowners come by their money through inheritance, the value of businesses that they own, or large pay packages. Banks and investment houses have cut compensation because of poor performance in 2008 and 2009. The money given to a Goldman Sachs manager is probably the exception and not the rule. Hedge funds and money management firms have had a rough two years, and many of them have closed.

Most inherited wealth is invested by financial advisers and private bankers. The track records of these money managers is probably not better than those who run the endowments at Harvard and Yale. Both universities lost about 30% of the value of their assets during their most recent fiscal years. If the same holds true for the idle rich, their incomes will have dropped sharply.

The business owner who has built a  company from scratch into a modest sized business that gives him a seven-figure income and multimillion net worth has probably not done well either. The recession hurt modest-sized businesses, usually, as much as large publicly traded companies. And, smaller businesses often rely on relatively few customers for most of their income. It does not take much in terms of client frugality to hurt a mid-sized company’s prospects.

Scott Fitzgerald wrote that  ”Let me tell you about the very rich. They are different from you and me.” Not anymore.

Douglas A. McIntyre