Markets

Luxury domestic market remains strong

Being rich can come with many privileges, but a smooth ride through the new home buying process is not one of them at the moment. While buyers of more modest means struggle to buy due to high interest rates and high prices, cash-strapped luxury buyers face another problem – lack of inventory.

“You have this pool of higher-wealth individuals, whether they’re baby boomers, international buyers or young people who have wealth from other sources that aren’t as sensitive to interest rates, if at all,” says Zonda chief economist Ali Wolf.

In 2020-21, sales of luxury homes skyrocketed across the country. Demand has been so high that it has created inventory shortages in nearly 200 luxury markets across the U.S., according to research by Luxury Portfolio International (LPI). The consultancy predicts that demand will remain strong for new projects and high-end developments, but an imbalance between buyers, sellers and supply could slow down the home buying process.

“From [the luxury buyer’s] U.S. real estate is still reasonably affordable, or a good inflation hedge, or just a good long-term investment,” says Wolf. “So while a lot of other groups of buyers are having to pull back because of financing costs, there’s this other pool of buyers who just don’t care because the change in interest rates isn’t going to make or break that decision.”

LPI also found that a lack of high-end housing inventory has created new pockets of luxury — which it defines as locations with median prices above $1 million. Idaho had the fastest growing luxury market between 2019 and 2022, while traditional favorite states such as California, Colorado, Florida, Texasand Washington experienced continued expansion.

Despite the general market slowdown, luxury builders like Toll Brothers continue to outperform Wall Street expectations. The builder reported a profit of $640.5 million on Dec. 6 and said home sales were $3.6 billion, up 21% from the prior year’s fourth quarter.

Overall, new construction has slowed across the country. But despite the difficulties with construction, the housing industry remains optimistic.

“We believe the long-term outlook for the housing market remains positive despite recent weakness,” Doug Yearley, Toll Brothers chairman and CEO, said in the fourth quarter earnings call. “Demographic and migration trends continue in our favor. Additionally, there remains a significant housing shortage in America as housing starts have not kept pace with population growth for at least the last 15 years.”

According to LPI, luxury consumers adapt better to global economic and social conditions than the general population. They have become more efficient homebuyers, prioritizing key facts and figures about the quality of their investments as well as the emotional aspects of the purchase.

“The luxury home buyer is arguably the most astute connoisseur of real estate in the world,” said Mickey Alam Khan, president of LPI. “The survey highlights that they are highly attuned to the realities of the global financial and geopolitical landscape, yet luxury real estate remains a preferred destination for their wealth. The panorama of the ‘Covid Boom’ is clearly behind us, with the latter half of 2022 ushering in the necessary market stability into 2023 and beyond.”

That doesn’t provide much comfort at Toll Brothers, where Yearley says it will take time to understand the 2023 market.

“During COVID, you could successfully sell out of the back of a station wagon. That’s no longer the case. As an industry, we probably won’t have a better sense of the depth and length of this downturn until we’re further into the spring sales season in March and April and hopefully after the Federal Reserve’s work is done,” he said. “We recognize that if market conditions do not improve, we will need to be more aggressive with price reductions to rebuild our backlog and turn our inventory around.”

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