The current slowing down of the real estate market has officially impacted the luxury market as well.
Since the start of 2022, the rates for 30-year fixed mortgages have spiked from the norm at 3% all the way up to well over 5%, prompting an intense drop in the demand for the acquisition of new purchase loans and the use of refinancing services. The overall sale of new single-family homes throughout April dropped to around 591,000, falling far short of the expectation set by analysts at 750,000 along with being 16.6% below home sales back in March.
We are even seeing these issues with luxury homes, which account for roughly the top 5% of the market in which they dropped about 18% over a period of time from February to April of 2022 in comparison to the same period of the previous year, according to a recent report that was published by Redfin, a prominent real estate brokerage, that was picked up by The Wall Street Journal. The prices for those properties still remain extremely elevated.
“Many home seekers are deciding that it’s simply not worth it to purchase a luxury home at a time that both purchasing price and lending costs are so high,” stated Joel Griffith, a research fellow for the Heritage Foundation.
Many persistent economic factors, such as the horrid labor market shortages and the intense supply chain bottlenecks that cause a spike in the overall inflation rates, are making many consumers hold off on their purchases and has started to directly impact the overall health of the housing market. Along with these factors, the current poor health of the stock market has also started to produce some hesitation throughout the market for luxury buyers.
“Relative to lower-priced homes, a greater percentage of purchase price is paid for in cash — rather than utilizing a mortgage since the cost often exceeds conforming loan limits,” stated Griffith. “Many purchasers are balking at cashing out of stocks at depressed levels in order to purchase real estate at inflated — possibly bubble — levels.”
As we have seen earlier this year, the Federal Reserve Bank of Dallas issued a prediction about a housing bubble during a “market exuberance” that is “unhinged from fundamentals,” a stark warning that has not been put forth since the unprecedented crash of the housing market that happened back in 2008.
Griffith stated that he is seeing the price of home prices starting to grow much faster than the growth of household income.
“The home price-to-median income ratio stands exceeds 7.2, eclipsing the 7.03 peak in late 2005. Compare that to a ratio of well under 5.0 from 1980 to 2000,” he stated. “In just 12 months, mortgage payments based on median home prices have increased more than 40% due to the rise in prices combined with a near doubling of mortgage rates. The mortgage payment-to-income ratio hit 34.9% in February — the bleakest affordability levels since 2008.”
Overall, the increased levels of inflation have led to an intense decline in real average hourly wages, despite the fact that unemployment still sitting quite low throughout the United States. Despite wages seeing a nominal growth between May 2021 and May 2022, the real buying power of wages saw a 3% drop because of the higher rate of inflation. For someone that earns $50,000 a year, the increased price levels across the nation have effectively caused a $1,500 annual pay decrease.
Many rich Americans who are still seeking to purchase property may set their sights on what would be normally middle-class homes, effectively putting much more pressure on the average American family.
“As higher-income, wealthier home buyers find themselves deterred from purchasing luxury homes, this may place yet more buying pressure on smaller, more modest homes,” stated Griffith. “Middle-class families may find themselves increasingly competing with wealthier families for lower-prices homes.”
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