let’s talk : the “decline” of the LUXURY MARKET – is this really happening???
Last week we talked about the real estate market in the Tri-state area, focusing on whether or not we are facing a bubble. One credible source brought about his view point stating that the Greater New York City area as a whole is in fact not in danger of a bubble, rather perhaps just the luxury market here might be. This sparked a discussion on the future of the luxury market nationwide– is our luxury market facing hard times ahead? If so, how might this affect our overall real estate market?
So, as we do we, let’s talk real estate, let’s talk the “decline” of the LUXURY MARKET- is this really happening???…
I think it’s best to start with a tad bit of background here. According to realtor.com, the nationwide average luxury market entry point starts at ~$804k (as of 2017). This ~$804k marker IS up 5.1% from 2016. While the luxury market did see price growth in 2017, the overall market’s growth outpaced that of the luxury market. Furthermore, the luxury homes were also spending an increased amount of days on the market (average of 116 days on the market, up 5.3% from 2016). So, is this a true signal for bad times to come?
As mentioned above, the luxury market still PREFORMED in 2017. There was in fact growth, just LESS growth than the year prior.
SO, WHY THE SLOWING GROWTH RATE FOR LUXURY HOMES?
Well, it looks to be a combination of a few of factors; (1) luxury oversupply, (2) increased uncertainty, (3) millennial buyers.
(1) Oversupply of luxury homes
Oversupply of luxury homes listed on the market has become exasperated by an increasingly limited pool of luxury buyers.
(2) Increased uncertainty
A new White House administration and tax reform brought about uncertainty for homeowners and buyers alike. For much of 2017, no one knew what to expect from this new tax bill. Ultimately, the new tax bill affected luxury home owners in that it;
- Reduced the mortgage interest deduction from $1MM to $750k AND how it can be utilized. Going forward, you can now only write off interest due to acquisition indebtedness aka the money lent to purchase or improve a home. NOW, if you had a loan PRIOR to the new tax bill, you are grandfathered into that $1MM marker, however you can no longer do things such as deduct the interest of a HELOC you took out in order to pay off a loan for something like school;
- Capped the property tax AND state income tax write-off at $10k total, whereas before you could write off 100% of both your property taxes for your primary and secondary residences (investment properties are treated totally different) AND state income taxes (before reductions due to AMT). This has the potential to be SUPER painful for high tax states like New York and California.
This effectively targets ALL luxury home owners as they paid >$804k for their homes ($54k higher than the interest deduction limit), most likely have property taxes >$10K (as their home values are $804k+), and tend to have more than one home.
(3) Millennial buyers
Even if they have the financial means, millennials are looking to “decrease their footprint” and want something more practical. In the 90’s wealthy buyers were looking for large plots of land to show off their wealth, whereas today the wealthy millennial buyers are more focused on the experience and location rather than how grand their “estate” may look. Wealthy buyers today are looking at location first, home second. Furthermore, 9 of 10 buyers today are looking for new homes that require very little work, and are not interested in purchasing the older, grand, multi-million dollar mansions.
COULD THE SLOWING LUXURY BUSINESS AFFECT HOUSING PRICES IN THE REST OF THE MARKET?
Maybe? Perhaps if luxury home owners were forced to lower the asking price on their homes. BUT studies are showing that luxury home sellers are not budging on price just yet. They are willing to “wait it out” and get the price they deserve. Might it affect those homes that are just on the price border of luxury vs affordable, maybe? However, from what I have seen, there would have to be a MASSIVE break in the luxury market for it to have enough affect on the rest of the housing prices, as the median home value in the U.S. is ~$207k (https://www.zillow.com/home-values/),
WHAT CAN WE EXPECT FOR THE REAL ESTATE MARKET IN 2018?
While experts are still forecasting a growth in the overall real estate market, they are also forecasting a change in buyer behavior whether it be opting for less expensive homes or pushing out their buying timeline.
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