Why is Sarasota’s luxury real estate market so hot?

There was the Key West-style Longboat Key mansion that sold for $6.1 million before it was even posted on a major real estate website. Then there was the $5.7 million sale of a waterfront penthouse, the most expensive condo sale in Sarasota-Manatee in more than a year.

And then there was the resort-like compound on Casey Key that, at $16.5 million, tied for the sale highest price ever in Sarasota County history. And that one sold in just 40 days.

The luxury housing market in Sarasota-Manatee and around the country is booming. In the first quarter of 2021, 86 single-family homes with a price tag of $2.5 million or higher went under contract, as did 105 condos, according to data from Premier Sotheby’s International Realty. Last year, 21 homes and 12 condos went under contract during that same period.

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Experts say the market’s strength can be attributed to a series of factors, including an increase in cash sales and the use of escalation clauses in sales contracts as buyers seek to make sure they get their house. COVID-19 is also a factor, as well as a massive wave of baby boomers retiring at once.

And while the market is strong now, some experts say this might be just the beginning. As more people discover Sarasota and tell their friends about their new hometown, there could be more waves of new buyers in the near future.

So many multimillion-dollar homes are being sold that local real estate professionals have started to look at “luxury” as anything over $3 million, as opposed to the usual $1 million.

“If you were shopping for a $3 million-plus property in March 2018, you had about 148 properties for sale. That’s a lot of inventory in the $3 million market, and we closed on 11 of those. Fast forward to March of 2021 – we have 98 properties on the market, and the really big news is we sold 65 of them,” Drayton Saunders, president of Michael Saunders & Co. real estate in Sarasota, said. “Buyers are willing to spend in a price point we historically haven’t seen be that active.”

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Previously: Buyers struggle in strong Sarasota-Manatee home sellers’ market

Baby boomer wave

Before COVID, the market was strong – Premier Sotheby’s was up 36% in the first two months of 2020 over 2019, which was a strong year in and of itself. This was partially driven by a wave of retirements by baby boomers, born between 1946 and 1964.

“The baby boomer wave was actually happening, the economy was strong and people were moving money out of the stock market because they thought it was overinflated,” Craig Cerreta, managing broker at Premier Sotheby’s International Realty, said.

COVID did cause a slowdown in demand for new homes, for about a month and a half, he said. But quickly, it became clear that working remotely could become an enduring way of life for many Americans. Suddenly, you could work your big corporate New York City job from a Siesta Key mansion.

And it turns out that the pandemic accelerated the rate at which baby boomers retired.

In the third quarter of 2020, 28.6 million baby boomers said they were out of the labor force because of retirement, 3.2 million more than the 25.4 million who reported retiring in the same quarter the year before, according to the Pew Research Center. Some of them also inherited money from parents who passed away, enhancing their buying power.

COVID-19 has also introduced new luxury buyers from the New York City area and California to the Sarasota market, largely by word of mouth, Saunders said.

The influx of new out-of-state buyers has helped drive up prices, he said, which is why some of the homes being sold now are more expensive than ever.

“Those buyers are coming with different sense of value. Their idea of what’s expensive is different than our typical luxury feeder markets,” Saunders said. “New buyers generally set the next price level. If you’re living here a long time, you’re not going to set the next price point.”

These factors have caused a shift in the Sarasota luxury market that Cerreta said he thinks is lasting.

“We didn’t have $19 million properties three years ago. The volume of luxury buyers went up so quickly that people who just would have gone to Palm Beach, or Miami or bought in Naples finally said, ‘Sarasota, their prices are lower, and it’s a nicer place to live,’” he said. “Now I think we’ve raised the floor for Sarasota. We’re no longer the occasional $10 million sale, it’s going to be a regular thing here.”

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Sarasota is definitely being discovered in a way it wasn’t before, Saunders said.

“People say, I want the beach, I want Florida and I want arts and culture, where do I get all three of those in a way that’s still relaxed? You can’t get that outside of Sarasota,” he said.

Cash sales and bidding wars

Typically, a luxury home will stay on the market for about 90 days, Cerreta said. But now, the nicest houses with great views that are priced reasonably are getting up to 15 offers on the first day, he said.

As a result, a lot of sellers have been taking advantage of escalation clauses, where a buyer makes an offer that commits them to paying a set amount on top of whatever the highest bidder offers – no matter what. Because of the voracity of the market, escalation clauses have become increasingly common, Cerreta said.

Of course, the seller doesn’t have to take the highest offer. A lot of factors go into choosing the right buyer – including whether those offers include financing or cash deals. And since so many luxury offers are being made in cash these days, a buyer might choose to accept a lesser offer just to get that cash guarantee.

“It increases the odds that the sale will fall apart if there’s a mortgage involved because bank will only lend against the appraised value of the house,” Cerreta said.

Escalation clauses, while great for sellers, can create a tremendous amount of frustration among buyers, Robert Goldman, a Realtor with Michael Saunders & Company in Venice, said. Some of them, after losing out several times, have pulled out of the market altogether and decided instead to wait and see where the market goes, he said.

“There’s tremendous frustration. The buyer says ‘the list price is $1 million, I’m offering you $1,050,000 with a price escalator to $1,075,000 and I’m still not getting it,’” Goldman said. “Wherever they go, the seller is king.”

Saunders said his experience has been a little different. While there is buyer frustration, it’s on the real estate agent to set expectations about the market, he said.

“Obviously sellers are in the driver seat in this market, so we talk with the buyer and say, ‘How do you want to navigate this market?’ They have to make a much faster decision,” he said.

Growth but not a bubble

It’s not just luxury that’s experiencing rapid growth. It”s the entire real estate market at all price points – from affordable to mid-tier to the highest of the high, Goldman said.

Low home supply, demand from millennials and Generation X buyers in their prime homebuying years and a desire for more space have led to an increase in home prices, according to CoreLogic, a research firm that tracks real estate data.

If mortgage rates in the U.S. increase by about 2% by the end of the year – which Goldman said he thinks will happen – the market will stabilize, he said, keeping it from forming a bubble like the one that eventually popped in 2008 to disastrous results.

Mortgage rates won’t have much of an impact on the luxury market since a lot of those deals are being made with cash, Goldman said.

Another difference between the lead-up to the Great Recession and now is who is buying houses, Saunders said. Right now, people are not buying homes to flip them, he said, and lenders are much more cautious about prospective buyers than they were in the early 2000s, he said.

“Buyers would have no income and no assets, and lenders weren’t asking, ‘are you qualified?’” he said. “It was a very unhealthy dynamic, with no vetting of buyers’ ability to close. People buying today have to qualify and have a good credit score, and the buyer really isn’t buying to flip, they’re buying to live. That’s the big difference.”

What comes next?

Homes may be selling like wildfire right now, but Saunders said he thinks this is only the beginning.

Typically when there’s a lot of buyer interest in a specific area, there’s the first wave of new buyers, followed by the second wave that comes when the first buyers tell their friends and family how great their new neighborhood is.

Then there’s the international market. Buyers from other countries make up a small share of overall homeowners in Sarasota, Saunders said, but at this point it’s unclear how lifted travel restrictions and the already hot luxury market will interact with one another.

One thing is clear – how people live really came into focus in 2020, Saunders said.

”This whole narrative of people’s choice and where do you want to live, I believe what we saw last year was the first part of that process – the people who felt most comfortable moving. What happens is when people discover Sarasota, the first thing they do is they tell their friends how much they love it,” he said. “COVID started it, but I think we will continue to see the luxury market driven by the trend started last year.

“Now, we’re playing on an even bigger stage.”

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This article originally appeared on Sarasota Herald-Tribune: Why luxury housing market in Sarasota-Manatee, around the US is booming