For the first time in over a decade, the sizzling real estate market seems to be cooling off. This isn’t to say the luxury real estate market is going cold – just that the market is no longer increasing at the same astronomical rate as it was in 2021 and the early parts of 2022. This is true in the luxury market, especially.
Luxury Home Sales Experience a Summer ‘Drop’
The recent housing market has been nothing short of astonishing. Fueled by low-interest rates, a scarce housing supply, and piles of unused cash stored up after a pandemic, home demand and prices ballooned to mind-boggling figures – especially in the luxury niche.
Record prices, all-cash bidding wars, multiple offers, 30-day inspection-free closes – we’ve seen it all over the past year. However, that trajectory was never going to be permanently sustainable.
“Lately, list prices have been dropping. Fueled by higher mortgage rates and inflation, homeowners around the region – and the country – are trimming price tags by hundreds of thousands of dollars,” Jack Flemming reported for the Los Angeles Times in June 2022. “That comes as sweet relief to buyers who’ve been waiting for some type of sign that things are slowing down. For sellers? Not so much.”
While we’re not quite ready to call this a buyer’s market – we’re still a long way from a world where buyers have the leverage – nobody in the luxury real estate industry can deny the small shifts that are occurring. The data is clear: Things are cooling.
According to data curated by The Title Report, sales of luxury homes have fallen 17.8 percent year-over-year (when analyzed during the three months ending April 30, 2022). This represents the single-largest drop since the start of the pandemic in March 2022. By comparison, non-luxury homes have dropped just 5.4 percent in that same period
Just as a perfect storm of factors drove the luxury market to new heights earlier this year, a combination of factors is responsible for the cooling effect we’re experiencing now.
Two of the most pertinent factors are soaring interest rates and a stock market that has shed much of its value over the past couple of months. Interest rates have nearly doubled since the start of the year. For luxury home buyers who plan to finance their purchases, each increase in rates can represent a monthly mortgage payment that’s thousands of dollars more expensive. At some point, these purchases become unrealistic, even for those flush with cash.
“The pool of people qualified to purchase luxury properties is shrinking because the stock market is falling and mortgage rates are rising,” Florida-based real estate agent Elena Fleck explains.
While no two situations are ever the same, Fleck says she recently had a buyer for a $2 million home that had to back out of the contract after realizing that their mortgage payment would be $3,000 greater than what they had originally planned (thanks to higher rates).
Unfortunately, for both buyers and sellers of luxury real estate, stories like this are becoming quite common. When Redfin analyzed the top 50 metro markets in the country, home sales fell in all but one (New York being the only exception). White hot markets like Nassau County, New York (-45.3 percent), Oakland, California (-32.8 percent), Dallas, Texas (-33.8 percent), and West Palm Beach, Florida (32.8 percent) were among the biggest year-over-year declines.
What a Cooling Market Means for Buyers
If there’s a winner in the cooling luxury real estate market, it’s definitely buyers (which is a refreshing change for individuals on that side of the table). However, it’s still extremely important that people work with the right luxury real estate company to find their dream property. Whether individuals are looking to lease, buy, or invest, now is not the time to take any chances.
For buyers, overpaying at this stage of the market is a huge mistake. Because prices have dropped some and the market appears to be softening, it’s tempting for luxury homebuyers to feel like they’re getting a deal.
However, this is likely just the start of a softening market. That means buyers who reach, thinking they’re getting a deal, could end up underwater in a couple of years. Again, nobody knows what will happen for sure, but shockwaves from the Great Recession have savvy real estate professionals warning their clients to proceed with care.
Putting it All Together
From a historical perspective, today’s luxury real estate market is hotter than it’s ever been. However, zooming in and analyzing the data from the past couple of years paints a slightly different story.
Both luxury home buyers and sellers need to pay close attention.