In the past couple of years, we have been seeing a real estate boom. Mortgage rates and inventory were astronomically low making for a seller’s market. People were bidding well above market price and still getting shut out by the competition.
Now, all that is changing. The world is experiencing inflation and experts are predicting that we are headed toward a recession. The Federal Reserve has responded by increasing mortgage rates.
Although rates are low historically, the increase has affected the market. There is less competition for properties and prices are dropping.
So, what does that mean for the luxury real estate market? Read on to find out.
What is Luxury Real Estate?
Luxury real estate is a term that’s not easy to define. It differs depending on the market. For example, in most U.S. cities, a luxury home is any home priced at $1 million or more. But in more and more markets like New York, where prices are much higher, a luxury home can start at $4 million or more.
The features of a home can also make it luxury. But you will find wide variances in what people consider luxury amenities.
For some, a luxury property is one with high end interiors, customized closets, spa and fitness centers and concierge services. For others, it’s a home in a good neighborhood with modern appliances.
What Will Happen to Luxury Real Estate in a Recession?
Although luxury real estate is hard to define, we can safely say it’s limited to higher-priced, upscale properties. Here are some factors that will affect the market as the economy weakens.
Lower Prices: Mortgage rates are going up and many sellers have had to lower their prices to make up for the discrepancy. These move-up buyers are now not able or willing to pay as much for their next home. Luxury sellers may have to follow the trend. While home prices are not expected to go down by too much they have started to drop, hitting the luxury homes the hardest so far.
An Increase in International Buyers: Although a recession may cause some homeowners to drop their prices, they will have an international market to appeal to. With COVID travel restrictions loosening up, many foreign investors are coming back to the market to make major purchases. And luxury properties in cities like Los Angeles, New York and Miami are often international favorites.
A Different Definition of Luxury: It used to be all about location, location, location. But now that more people are working from home, and no longer need to be conveniently located, they are moving to the suburbs to take advantage of the lower prices. That could redefine luxury as people seek out amenity laden properties in unexpected locations.
It could also redefine luxury in terms of price. Luxury sellers are having to lower the prices of their homes. Currently, the median price of a luxury home is $1.15 million. This is 27.5% down from a peak season in the spring of 2021. It is predicted that prices won’t sink much further, but you never know.
We are also seeing an increase in luxury properties in locations where properties are historically cheaper than the national average. Florida is responsible for some of the most expensive listings. Texas is also seeing increases as nearly a quarter of sales that happened between 2020 and 2021 were considered luxury.
Besides the low prices, buyers are also attracted to Texas and Florida due to the lack of income tax and the low construction prices. This is something to keep in mind If you are helping clients with real estate in Texas or Florida.
An Increase in Inventory: When mortgage rates were sinking, it was difficult to get your hands on any properties leading to a lack of inventory. In the coming months, inventory is expected to increase due to new construction and higher rates. So how will this affect the luxury market?
Experts believed luxury homes wouldn’t be affected much by a change in inventory. When inventory was scarce at the end of 2021, luxury homes were still available due to their high prices. Now that inventory is back on the rise, we expected to see the same, however, recently luxury homes have taken a large hit.
An Increase in Second Home Purchases: In the past, many people were reluctant to buy a second home. They felt a second home wouldn’t be used that often due to few vacation days a year.
Now that more people are working from home, they are investing as they feel free to go from location to location without needing to take time off. Most second homes are luxury properties.
Should I Sell My Luxury Home?
With the United States hurtling towards a recession, you may wonder if now is the best time to sell your home. Here are some pros and cons to consider:
Pros:
- If economics get worse, home values will go down. If you sell now, you may get a better price than you will in a few months.
- If you are ready to downsize, now is a good time to act. You may even be able to get a smaller luxury home at a more affordable price.
Cons:
- If your mortgage is paid off, and you can afford your property tax, there is no real reason to sell.
- If you have enough money saved that you can live on it for a while, you don’t need to sell.
- If the recession won’t put you at a financial risk that makes you likely to lose your home, hold on to it.
- You might not get the highest value for your home during a recession. Unless you desperately need the money, you are best off riding out the recession.
The recession will affect luxury homes causing prices to drop. But an increase in second home purchases and the demand from the international market will hopefully allow it to remain relatively stable. How will this outlook affect your next luxury real estate move?
