The nation's single-family housing market is springing back to life, and the luxury market is budding right along with it.
Luxury homes have received a healthy boost from historically low mortgage rates, increased buyer confidence and burgeoning interest from foreign investors looking to capitalize on favorable exchange rates.
One bellwether of the recovery: Toll Brothers, the largest luxury home builder in the United States, reported that fourth-quarter revenues (ended Oct. 31, 2012) were up 48%, and new orders were the highest level seen since 2006.
"Pent-up demand, rising home prices, low interest rates and improving consumer confidence motivated buyers to return to the housing market in FY 2012," said Douglas C. Yearley Jr., Toll's CEO.
According to real estate data firm Data-Quick, sales of existing homes priced at $1 million and above increased by 9% during the first nine months of 2012 as compared with 2011. In California, those sales rose 14.8%. In 2011, the new luxury home segment increased to 18% of the market — the same as during the housing boom years of 2004 and 2005, according to Ed Hudson, director of market research at the National Association of Home Builders' Research Center in Upper Marlboro, Md.
"In time, the continued increase in home values will do a lot to fix the structural issues of industry economics, like low appraisals and tight lending standards, and pave the way for a return to robust housing demand," Hudson said. "For these reasons, I am bullish on the luxury home market."
Toll Brothers' new-home sales rose in all four regions: North, South, Mid-Atlantic and West, while the December 2012 Coldwell Banker Previews Luxury Market Report reported the highest number of luxury listings in southern California; Miami Beach and Naples, Fla.; Aspen, Colo.; Greenwich, Conn.; and Paradise Valley, Ariz.
Luxury home features have changed along with the shifting economy. While overall square footage is being trimmed, high-end homes today embrace open floor plans on the first floor, including a flex space that provides privacy when needed, according to the American Institute of Architects. Kitchens still rank high in importance, with designers creating custom storage solutions to allow windows above the countertops rather than cabinets to keep the rooms light and bright, said the NAHB. This connection to the outdoors continues with multiple outdoor gathering spaces.
Also in demand: smart home systems that monitor and manage systems. Upscale buyers are opting for energy-efficient appliances, programmable irrigation systems that help to conserve water and natural materials such as stone. Builders and trend watchers across the country echo these sentiments.
"The trend for building luxury new homes is to combine attractive, innovative design with true functionality," said Greg Nelson, owner of Nelson Construction & Renovations in Clearwater, Fla.
A survey by the NAHB showed that respondents think the average single-family home will shrink to 2,152 sq. ft. in 2015, a decrease of approximately 10% from the average single-family home completed in 2010, which is 2,392 sq. ft.
"Because the population is aging, they are downsizing, and there is a recalibration of their values," said Christopher P. Ramey, president and founder of Affluent Insights and chairman of The Luxury Marketing Council Florida. "Most people would never have guessed that their real estate investments would have vacillated the way they did, and 90% were relying on their house as an integral part of their nest egg. That nest egg cracked."
In response, homeowners are requesting luxury new homes that feature the essentials: a living room, a kitchen, bedrooms and a comfortable bathroom.
"Because the new-home market is so much more competitive, there isn't a lot of extra money to buy poorly planned spaces," Hudson said. "A lot of things that were considered standard in luxury homes, like a two-story entryway and family room, are less popular because it is perceived that you are losing valuable living space."
Just because luxury homes are maximizing square footage doesn't mean that style and design are being left behind.
According to the NAHB, the average floor area of the kitchen has increased by about 50% from 1973 to 2007, when the average kitchen size topped out at 303 sq. ft., or about 12% of a home's overall space.
"During the recession, we did not see money getting pulled out of the kitchen," Hudson said. "Wood cabinetry and granite countertops are still popular."
Homeowners today want rooms that can transform to accommodate a family's changing lifestyle, such as children's bedrooms that shift to a library or craft room once the kids are off to college.
"We are seeing a trend toward more flexibility with executive custom homes," said Tom Swigart, VP operations for High Ridge Custom Homes in Haymarket, Va. "Buyers want a home that works as well when they have three teenagers at home as it does when they are empty nesters, and even as they move into retirement. This means each room must be