Geography of Luxury Real Estate

Goodbye, New York; hello, Minnesota? During the last real estate boom, high-end home markets turned up in unexpected places

If you could spend a few million on a modest Manhattan condo and a cozy (read: tiny) Hamptons shack, or put the same amount toward a penthouse in Minneapolis and a lakeside mansion in nearby Wayzata, Minn., which would you choose?

People continue to sacrifice size and quality for location and salary. That's why states such as New York and California still have the hottest markets for luxury homes. And the top addresses on Fifth Avenue and in Bel-Air just keep on rising in value despite the spreading malaise at the lower end of the housing food chain. But that doesn't mean that luxury real estate isn't continuing to appreciate in other areas as well.

"The hot luxury markets are moving around, based on where the lifestyle is wonderful and the economic fundamentals are solid," says Laurie Moore-Moore, president of the Dallas-based Institute for Luxury Home Marketing. "Today, we're looking at a whole different group."

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Pro-Business, Pro-Wealth

In 2000, only 0.37% of the homes in Virginia were valued at $1 million or more, according to the decennial census. The Census Bureau's 2005 survey revealed that the number of homes valued in the $1 million-plus range had increased 470%. Luxury homes now accounted for 1.92% of total existing homes—nearly as much as Florida's 2.08%.

The Washington (D.C.) metro area, including the affluent suburbs of Alexandria and Arlington, Va., has always attracted well-heeled homeowners, many of them lobbyists, high-ranking government officials, and senior business executives. Luxury buyers are still flocking to homes along the Potomac and driving up prices, says Valerie Moss, a realtor at Coldwell Banker Elite in Stafford, Va. Oceanfront towns like Virginia Beach also remain popular spots for vacation homes. "You're going to see them anywhere there's water or golf courses," says Moss.

Virginia's economy continues to grow, bringing in wealthy business leaders. Business-site selector Pollina Corporate Real Estate chose the state as the top pro-business state in the U.S. for 2007, citing its strong job creation and low corporate income taxes. Companies headquartered in the state include Capital One Financial in McLean, electronics retailer Circuit City in Richmond, and Argon ST, an engineering company in Fairfax that designs and produces systems and sensors for U.S. military and intelligence clients.

Second-Home Secrets

Booming business isn't the only thing fueling the emergence of luxury home hot spots. Alternative markets for second homes and retirement have popped up across the country as traditional markets grew unaffordable to many in the first half of the decade. In Rhode Island, the high-end market for oceanfront property has grown well beyond Newport's fabled Gilded Age mansions—the number of homes valued at $1 million or more jumped from 898 in 2000 to 4,209 in 2005.

"The smart money has started to appear," says Melanie Delman, president of Lila Delman Real Estate, an affiliate of Christie's Great Estates in Narragansett. "But the pricing here is still better compared to the Hamptons and Nantucket. It's still a little bit undiscovered." According to Delman, Rhode Island coastal towns such as Watch Hill, Westerly, and Misquamicut are winning the attention of professionals from New York City and Boston, as well as retirees.

Price appreciation in the past few years has also played a role in the expansion of luxury markets in many states. "There were many homes in the mid-to-late '90s in the $700,000-$900,000 price range that because of the significant appreciation were pushed into the price category north of $1 million," says Robert Hare, a realtor at White Oak Real Estate Advisors in Wayzata, Minn., specializing in upper-bracket homes.

In Minnesota, however, price appreciation rates remained lower than in more speculative markets, so relatively lower home prices to begin with may also account for some of the state's recent high-end home growth. "Minnesota has always been a conservative market, even though there are many wealthy people," says Hare. "In the past it wasn't unusual for someone to have a home in Florida or Arizona of greater value than their principal residence in Minnesota."

But in recent years, Hare says it has become more "socially acceptable" to live in a $1 million-plus home in the state. Between 2000 and 2005, the number of Minnesota homes valued at $1 million or more increased from 3,500, or 0.25% of total homes, to nearly 14,000, or 0.91% of total homes. This growth is concentrated in the Minneapolis-St. Paul metro and around the lakes in the Brainerd-Nisswa region.

Wealth Overspill

In the Southwest, the Arizona luxury market started to sizzle when California's prices skyrocketed and people wanted more for their money. The percentage of total homes in the $1 million-plus range went from 0.47% in 2000 to 1.32% in 2005, with a large part of that increase occurring in the Phoenix-Scottsdale area. "There are no hurricanes or fires here," says Laura Mance, regional vice-president of Coldwell Banker Residential Brokerage for Southern Arizona.

The Tucson-area luxury home market is also up and coming. Mance remembers the first time one of her agents sold a $1 million home in that market in the late 1990s: "It was the first $1 million home anyone remembered selling." Now, Mance says it's common for homes to sell north of $1 million, mostly to baby boomers and retirees from all over California, New York, New Jersey, and the Midwest. "Two million gets you twice as much here," she notes.

As "spillover" markets like Arizona shift across the country, new luxury real estate markets should surface in 2007. Moore-Moore of the Institute for Luxury Home Marketing expects to see strong showings from the Carolinas and Texas cities like Austin and Houston.

"We have a new group of hot markets for 2007 where economic fundamentals are good, homes have not gone through rapid appreciation, and lifestyle is attractive," Moore-Moore says. "These markets will be the big winners in 2007."

Roney is Real Estate writer for BusinessWeek.com.