In the luxury home market there is a mad dash for the exit.
However, buyers are holding their noses as Luxury Home Sales See Biggest Slump in Nearly a Decade.
Sales of homes listed at $2 million and above fell 16% in the first quarter, the sharpest annual decline since 2010, according to Redfin, a real estate brokerage.
This as the supply of those homes rose 14%, marking four straight quarters of annual increases in inventory.
The average price of a “luxury” home, which Redfin defines as the top 5% in each of the 1,000 cities it tracks, fell 1.6% to $1.55 million. Nonluxury homes saw their average price rise 2.7% annually to $300,000.
“Not only do the new rules make it less desirable to purchase a multi-million dollar home in high-tax states, it has also motivated some people—especially those with big incomes and big housing budgets—to consider moving to places like Florida, Washington or Nevada, which have no state income tax,” wrote Redfin’s chief economist, Daryl Fairweather, in a release.
The shift in the luxury market has been more pronounced, therefore, in certain metropolitan markets. The average luxury sale price fell hardest in Boston (-22.4%), Newport Beach, California (-21.8%), and Miami (-19.3%). Miami’s drop may have been less about tax changes and more about overbuilding on the luxury end in recent years that has led to an oversupply of high-end homes for sale.
Just Starting
This trend is in its infancy.
Retiring or retired boomers whose kids have long ago moved out of the house are tired of maintaining these gargantuan homes.
Some want to move closer to their kids, others need to move closer to their kids for health reasons.
Another subset wants to be closer to their grand kids.
Perhaps now its just the way top end, over $2 million, but that will quickly trickle down.
A $2,000,000 home discounted to $1,600,000 or cheaper will affect the prices of all the homes currently in the $1,200,000 to $1,600,000.
I fully expect a cascade, just like we saw in 2007-2010, just not on the same scale or same impact.
Mike “Mish” Shedlock
The USA does not have a monopoly on manufacturing as it did after WWII. American labor bid up its price beyond sustainable incomes. The jobs left. Americans are not smarter. Americans do not work harder. Americans do not have better technology. Americans must adapt to the world standard of living and the world price for labor. The housing market is for 900-1500 sq ft homes in safe desirable suburbs. These have not been built since the 1950s.
Well, it is becoming clearer to me that much of residential real estate, as an asset class, is currently tremendously over-valued, given the recent changes in the tax code and the propensity of hopelessly bankrupt municipalities to endlessly increase property taxes. With interest rates already so low, capital gains on bonds (in the absence of negative interest rates, which given the USA’s massive current account deficit will be very difficult to implement and maintain) will be slim to none. There seems to be no alternative to the stock market. So higher it probably goes, until the inevitable, gut-wrenching bust.
Yup, this is gunna be a doozy: the middle class continues to be gutted and yet the supply of multi-million $ homes increases. One day we’ll all be millionaires! Oh wait …
The idea is that the proceeds from gutting the middle class, go into multimillion dollar homes for the gutting beneficiaries.
If you read the article, it isn’t that the supply of high end homes is growing, it is that the supply of unsold high end homes is growing. People want out but can’t find buyers.
Same difference. High supply meets declining demand. New gold deposits found today are largely irrelevant while gold mined a hundred years ago is still potential supply today.
I would argue there is a difference. This one is more significant. If it was just a matter of Pulte Homes continuing to assume “American will buy what we build them” that would be changes to the supply curve. This is a matter of change in the demand curve – buyers are not seeking houses of this type.
My next three thoughts are:
if the cause of dropping demand is one of property taxes then the real squeeze is on municipalities as they will be forced to adjust the property tax curves to target more middle class. Probably a fast track to a collapsing community.
If the cause is simply one of prices, then this will eventually equalize as the prices across the top of housing adjusts. We’ll just be paying less for 4,000 sq ft homes in the future. Arguably a form of deflation but likely compensated by the long term increases in food and fuel prices that the Fed refuses to measure. Ironic that the most inelastic goods are not tracked.
Lastly, if the change in demand is simply because no one wants to live in 4,000-10,000 houses anymore because of their comparatively excessive nature in terms of maintenance and costs. It takes a lot of money to not only heat 4,000 sq ft but to furnish it as well. If there really is a shift from “things” to “experiences” then large houses might simply be out of favor as impractical to the new lifestyles. Experience based lifestyles would promote smaller homes, apartments, condominiums. I see a lot of condominiums being built in my area, almost exclusively.
Prices down??? OUTRAGEOUS this is! ! Time for the FED to buy some property !
You know that’s coming, just a matter of time.
print, print, print….
Met some retired neighbors many years ago who wanted to sell their 4000 square foot home, and it was simply because for them it was too big. Nothing financial, just too much for them. That’s when I realized that at a certain future point oversized homes would be a thing of the past.
Changes in the tax code now limit the mortgage interest deduction and cap SALT tax deductibility at $10,000. I just spoke yesterday to someone whose 2018 Federal tax bill increased by $40,000, even though his income was flat year-over-year. Ouch!