When mortgage rates soar and mortgage applications crash, a housing affordability crisis is underway. The latest sign of cooling demand and a possible turning point in real estate markets could be the plunge in luxury-home sales.
A new Redfin Corp. report shows sales of luxury homes tumbled 17.8% year over year during the three months ending April 30, the most significant drop since the start of the virus pandemic. Two other times in the past decade saw steeper declines, both in the early days of the pandemic before the exodus out of metro areas.
“The luxury market is cooling as soaring interest rates, a tepid stock market, inflation and economic certainty put a damper on demand. For a luxury buyer, a higher mortgage rate can mean a monthly housing bill that’s thousands of dollars more expensive,” Redfin said.
The slowdown in luxury home sales began in the summer of 2021. There was also a shortage of luxury homes on the market as wealthy remote workers fled metro areas for tax-friendly rural towns and states. Redfin notes the “inventory crunch has started to ease.”
Elena Fleck, a Redfin real estate agent in West Palm Beach, Florida, brings up a very important topic, something we’ve outlined to readers of what would crack the housing market: The emergence of the housing affordability crisis.
Meanwhile, the median sale price of luxury homes rose 19.8% year over year to $1.15 million during the three months. Price growth is still way above pre-COVID levels and remains elevated because of tight supply.
An interest rate shock triggering an affordability crisis could soon cool luxury markets even more.
“My sellers have become increasingly open to the idea of lowering their asking prices as interest in luxury homes has tapered off,” Fleck said. “One seller recently called me to let me know they’d be willing to knock $100,000 off their home’s asking price of about $2 million.”
Redfin outlines the areas with the most significant annual declines in luxury-home sales.
The plunge in luxury-home sales coincides with a decline in household wealth as stocks, bonds, and cryptos drop as the Federal Reserve is on a destructive warpath of aggressive rate hikes to quell out-of-control inflation. The housing affordability crisis continues to cool the real estate market.