Luxury Home Sales Take a Fiscal Beatdown

The rolling three-month moving average of luxury homes sales took a beating in the period ending November, according to Redfin. The 38% year-over-year volume drop was the largest on record according to the firm’s data, but that only goes back to 2012, so might miss some previous big catastrophes like the Great Recession.

Non-luxury home sales volumes were also down by 31.4%. Not as large, but again the biggest since at least 2012. It’s not clear whether the differences are statistically significant or not.

The figures are based on Redfin estimates of property values, with “luxury” being homes estimated as in the top 5% of market value and non-luxury in the 35th to 65th percentiles. That does leave some large sections of the market unaccounted for and the firm did not provide information on those. It might be that changes in volume were different in them.

The biggest drops in luxury home sales were coastal markets. Nassau County, New York saw a 65.6% fall. “Next came four California metros: San Diego (-60.4%), San Jose (-58.7%), Riverside (-55.6%) and Anaheim (-55.5%),” the report said. “These markets are prohibitively expensive for most buyers even when the economy is thriving, so it’s not surprising more buyers would back off during a downturn.”

Redfin listed a number of potential reasons for the change, which will likely seem reasonable to CRE professionals. Those reasons include inflation, higher interest rates, falling stock values that worry people about their overall portfolios, and concerns about a recession that might drive property values lower.

The firm noted that some additional factors might have pushed the luxury market into a larger decline. For example, when the economy gets tighter, luxury goods are often first on the chopping block from family budgets, although it’s a question of whether wealthier consumers who could afford more expensive houses would treat such a long-term asset the same way as other consumer goods.

What rings truer is the second factor that Redfin mentions: “Luxury properties are frequently used as investment properties, and with home values and rents poised to fall in 2023, investment prospects are lackluster.” With prices having been higher and mortgage rates the same, it may have seemed like bad timing to invest now, rather than wait to see how things shook out. In addition, many wealthier people who could afford luxury homes also likely have a lot of their investments in the stock market. Given the

Also, high end home sales “saw outsized growth” during the pandemic years and had more room to fall. People might have already made their purchases during more favorable conditions, possibly pushing them forward in anticipation of inflation and higher lending rates. Falling share prices during 2022 could have led people into greater caution.

Redfin did note that there were early signs of improvement in house sales. But while improving, they are still far from where they had been.