High mortgage rates and high home prices dampen home sales, even among luxury offerings.
Existing home sales fell 0.4% in August compared to July, the seventh consecutive month of declines, and 19.9% from the previous month, according to the National Association of Realtors.
Expensive homes have not escaped deflation. Sales of luxury homes, defined as those in the top 5% of market value, fell 28.1% year on year in the three months ended August 31, according to real estate brokerage Redfin. This is the biggest drop since at least 2012, when Redfin data began.
“Rising interest rates, inflation, a tepid stock market and economic uncertainty are driving luxury buyers down,” Redvin said.
The Federal Reserve has raised its target federal funds rate by 3 percentage points since March, and mortgage rates have risen to their highest level in nearly 14 years.
Meanwhile, the S&P 500 is down 21% this year. The economy contracted 1.6% in the first quarter and 0.6% in the second quarter.
“High-end home hunters are in for a shock when they see the impact of higher mortgage rates,” said Redfin Chief Economist Daryl Fairweather.
“For buyers of luxury goods, a higher interest rate can equate to a monthly housing bill of more than thousands of dollars.”
For example, “Someone who was in the market for a $1.5 million home last year may now have a maximum budget of $800,000 thanks to higher mortgage rates,” Fairweather said.
Luxury goods are often the first thing that is cut short when uncertain times force people to re-examine their finances.
Cash buyers who buy luxury homes as investments may remain out of the market due to the concern that prices will fall further. They can now get an interest rate of more than 4% on the safe bond instead of risking their money on an expensive house.
Price growth is slowing
At the same time, increases in the price of luxury homes are dropping rapidly.
The median sale price of luxury homes rose 10.5% year-over-year in the three months ended August 31, to $1.1 million. That compares with a record high of 27.8% in the previous three months and 20.3% a year earlier.
“Luxury home prices have inflated so much that many buyers don’t feel they can justify the purchase,” said Sam Schott, a Redfin real estate agent in Miami. “This drop in demand is causing price growth to slow down.”
In addition, stocks are rising from low levels, Redvin noted.
If you are looking for a luxury home for the money, now is probably a better time to buy than it was three months ago.
But luxury home prices may fall until the end of the year, when the Fed is expected to raise interest rates again in November and December. So you may want to wait before jumping in.