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Luxury-Home Market Suffers as Sales Fall

'Rising interest rates, inflation, a tepid stock market and economic uncertainty' are keeping luxury buyers away, Redfin said
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Soaring mortgage rates and elevated home prices are damping home sales, even among the luxury offerings.

Existing-home sales fell 0.4% in August from July, the seventh straight month of declines, and 19.9% from the year-earlier month, according to the National Association of Realtors.

High-priced homes haven’t escaped the downturn. Sales of luxury homes, defined as those in the top 5% of market value, plunged 28.1% year-over-year in the three months ended Aug. 31, according to real estate brokerage Redfin. That’s the biggest descent since at least 2012, when Redfin’s data begins.

“Rising interest rates, inflation, a tepid stock market and economic uncertainty are causing luxury buyers to back off,” Redfin said.

The Federal Reserve has raised its federal funds target rate by 3 percentage points since March, and mortgage rates have soared to an almost 14-year high.

Meanwhile, the S&P 500 has dropped 21% this year. And the economy shrank 1.6% in the first quarter and 0.6% in the second quarter.

‘Sticker Shock’

“High-end-house hunters are getting sticker shock when they see the impact of rising mortgage rates,” said Redfin Chief Economist Daryl Fairweather.

“For a luxury buyer, a higher interest rate can equate to a monthly housing bill that’s thousands of dollars more expensive.”

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 to get cut when uncertain times force people to reexamine their finances.”

Cash buyers who purchase luxury homes as investments also may be staying out of the market over concern that prices will fall further. They now can get an interest rate of more than 4% on safe bonds instead of risking their money on an expensive home.

Price Growth Decelerates

At the same time, luxury-home-sales price increases are falling quickly.

The median sale price of luxury homes climbed 10.5% year over year in the three months ended Aug. 31, to $1.1 million. That compares to a record high of 27.8% in the prior three months and 20.3% a year earlier.

“Luxury-home prices have ballooned so significantly that many buyers just don’t feel they can justify the purchase,” said Sam Chute, a Redfin real estate agent in Miami. “That decline in demand is causing price growth to slow.”

In addition, inventories are rising from depressed levels, Redfin noted.

If you’re looking to a buy a luxury home for cash, now is likely a better time to buy than three months ago. 

But luxury home prices may drop through the end of the year, as the Fed is expected to lift interest rates again in November and December. So you might want to wait before jumping in.