Soaring mortgage rates and high home prices are dampening home sales, even among luxury offerings.
Existing home sales fell 0.4% in August from July, the seventh consecutive month of decline, and 19.9% from the previous month, according to the National Association of Realtors.
Expensive homes have not escaped the slowdown. Sales of luxury homes, defined as those belonging to the top 5% of market value, fell 28.1% year-on-year in the three months ended August 31, according to real estate broker Redfin . It’s the biggest descent since at least 2012, when Redfin data began.
“Rising interest rates, inflation, a tepid stock market and economic uncertainty are pushing luxury buyers back,” Redfin said.
The Federal Reserve has raised its target federal funds rate by 3 percentage points since March, and mortgage rates have hit a nearly 14-year high.
Meanwhile, the S&P 500 has fallen 21% this year. And the economy shrank 1.6% in the first quarter and 0.6% in the second quarter.
“High-end home hunters are shocked when they see the impact of rising mortgage rates,” said Redfin chief economist Daryl Fairweather.
“For a luxury buyer, a higher interest rate can equal a monthly housing bill that costs thousands of dollars more.”
For example, “someone who was in the market for a $1.5 million home last year can now have a budget max of $800,000 thanks to higher mortgage rates,” Fairweather said.
“Luxury goods are often the first to be cut when uncertain times force people to re-examine their finances.”
Cash buyers who buy luxury homes as investments may also stay out of the market for fear that prices will fall further. They can now earn over 4% interest on safe bonds instead of risking their money on an expensive house.
Price growth is slowing
At the same time, price increases for luxury homes are rapidly diminishing.
The median sale price for luxury homes climbed 10.5% year over year in the three months ended Aug. 31, to $1.1 million. That compares with a record 27.8% in the previous three months and 20.3% a year earlier.
“Luxury home prices have gone up so much that many buyers just don’t think they can justify the purchase,” said Sam Chute, a Redfin real estate agent in Miami. “This drop in demand is slowing price growth.”
Additionally, stocks are rising from depressed levels, Redfin noted.
If you’re looking to buy a luxury home for cash, now is probably a better time to buy than three months ago.
But luxury home prices could fall through the end of the year as the Fed is expected to raise interest rates again in November and December. So you might want to wait before jumping in.