Real Estate Market Disruption Coming In the Luxury Home

March 16, 2020

High-end homes not flying so high

But one segment of the housing market is not expected to enjoy such exuberance: the high-end . “We’ve seen a slowdown at the top end of the housing market,” Terrazas said on CNBC.

The problem at the high-end isn’t caused by lack of affordability. Quite the opposite. There have never been so many Americans that can afford a high-end home. The Federal Reserve Board’s most recent Survey of Consumer Finance (SCF) identifies some 12.6 million households at the top 10% level of wealth nationwide. The net worth threshold to rank among the nation’s top 10% is $1.2 million in total assets, in 2016 dollars; millionaires all.
But even with many more potential wealthy buyers, demand just isn’t there. The prices at the top 5% of the housing market, which says started at $804,000 in 2017, increased at a slower rate than the bottom 95% of homes. In 2017 high-end home prices rose only 5.1% from 2016, whereas the median price for the remaining 95% of housing inventory rose 6.9%. The high-end housing market is location dependent, so some markets will remain strong, like San Jose, CA, the fastest-selling market last year where the typical home sold in 41 days. By contrast, it took an average of 134 days to sell a home in the high-end New York/Northern New Jersey market, the slowest of the 35 markets Zillow analyzed. There are other signs of weakness at the high end reported by Specifically, there is an increase in the number of days a high-end home remains on the market and the age of inventory at the high-end slowed over 2016, which Javier Vivas, director of economic research for said in a statement, was “a telltale sign that the luxury sector as a whole has weakened. Much of this slowing can be attributed to a wider selection of luxury homes for buyers and increased uncertainty over the last 12 months.” Wealthy are risk-adverse If there is one thing I’ve learned from researching the affluent consumers is they are exceptionally vigilant managers of their own money and highly risk-adverse. The uncertainty that Vivas talks about makes for high risk when the wealthy consider buying or selling a home. They don’t move, literally or figuratively, unless they feel confident it is wise and prudent to do so. Last year’s change in tax policy impacting mortgage deductions and local real-estate tax write offs added a level of uncertainty that is hard for the wealthy to swallow. While Congress was working on the new tax legislation, The National Association of Realtors said that the changes under discussion would result in at least a 10% across the board drop in housing prices. At some $800,000 for the high-end home, that could mean a whopping $80,000 decline in price. Further a detailed analysis by NAR found prices would fall in every state. Excess inventory at the high-end   In the housing market, limited supply means higher prices, while extra inventory drives prices down. Which is what should happen at the high-end of the market. “The high-end of the market is not as supply constrained, so new supply is more readily available,” says Skylar Olsen, senior economist at Zillow. The greatest shortfall in housing inventory is in the starter-home (median price $178,034) and trade-up ($302,893) segments of the market, reports Trulia, a Zillow Group company. By contrast, in the fourth quarter 2017, the premium segment of the housing market (median price $631,358) holds the largest share of the market than in any quarter since 2012. The wealthy can afford to be picky when considering a new home. Some 53% of available housing inventory is in the premium segment, as compared with 23% starter homes and 24% trade-up. This can only mean more downward pricing pressure on high-end homes in 2018. Millionaires still live next door Another indicator of trouble in the high-end housing market comes from data collected by the Federal Reserve Board SCF. The majority of the wealthiest Americans don’t live in a luxury home; far from it. Some 21% live in a home worth less than $250k, and nearly one-third live in one valued between $250k-$500k. Only 16% have a home worth $1m or more.

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