Luxury real estate owners and agents are enjoying high prices and a seller’s market, and have been for the past couple of years. It’s been a great time to sell a luxury home, whether you’re an individual owner or a real estate agent working on their behalf.
Will this momentum continue and push prices higher? Is the luxury real estate market headed for a crash? Or will prices simply stabilize in time?
How the Luxury Real Estate Market Is Different
Luxury real estate follows most of the same trends as typical real estate, with a few important differences. For starters, luxury real estate buyers aren’t just looking for a certain square footage or a certain price; they’re interested in finding something both unique and superior to the typical homes on the market in a given area. Because of this, sellers, buyers, and marketers must engage with these properties differently.
Additionally, prices in the luxury real estate markets tend to be somewhat more volatile and unpredictable than in other sectors; in fact, they’re often considered indicating factors of what’s in store for the rest of the market. If luxury real estate prices begin to spiral downward, real estate agents all over the country brace for the worst.
Why the Luxury Market Has Been Up
The luxury real estate market has been booming for several important reasons, including:
· Low interest rates. Arguably the biggest factor for rising prices is decreasing interest rates. Federal Reserve interest rates were already low at the start of the COVID-19 pandemic, and these rates were slashed even further to spur economic activity. One of the downstream effects of this is that consumers have access to much lower interest rates for mortgage loans – ultimately lowering the monthly costs of home ownership and driving more people to purchase homes. Increased demand naturally leads to higher prices in this area.
· Remote work, freedom, and mobility. The COVID-19 pandemic also saw an increased number of people working from home, and in many cases, permanently. People have had more freedom to live where they want to live, leading to increased moving rates for people with high-earning jobs.
· The increased role of the home environment. In line with this, the home environment has become more important than ever. People have spent more time indoors, realizing the importance of having a home workspace, a shared space with family, and additional space for activities like physical exercise. Accordingly, homebuyers have gravitated to buying bigger, more luxurious properties.
· Limited inventory. There’s a finite amount of property available and new homes aren’t being constructed at a fast enough rate. Inventory is shrinking in many areas, and with demand only growing, the limited supply is pushing prices even higher than normal.
What Could Change?
If these factors continue putting pressure on the market, it’s likely that luxury real estate prices could climb even higher. However, any of the following events or changes could force prices to stabilize, or even lead to a crash:
· Rising interest rates. The Federal Reserve has announced plans to raise interest rates by 2023, but it’s unclear how or when, exactly, this is going to unfold. When interest rates rise, real estate market prices tend to fall; if the interest rate grows too rapidly, it could end up triggering a full-scale real estate crash (which is something the Fed wants to avoid if possible).
· An economic slump. A major economic downturn could also spell trouble for the luxury real estate market. If stock prices begin to fall and unemployment begins to rise, it could force some luxury real estate buyers out of the market – and make conditions tougher for those who remain.
· A surge in inventory. A big surge in inventory could significantly decrease supply concerns, mitigating high prices on the supply side. For this to happen, we would need a massive increase in new constructions in areas around the United States; even if this unfolds, it could be months before we see the effects.
· Major political events. Major shakeups can also come from major political events, such as a change in leadership or the start of a military conflict.
It’s hard to say where the luxury real estate market is headed from here because there are so many independent factors responsible for prices and demand. The matter is even more complicated because there isn’t a single, comprehensive luxury real estate market we can easily track; instead, luxury real estate markets are multifaceted and distributed, with each area of the country subject to its own increases and decreases. While it’s entirely possible for luxury real estate prices to rise further, it would only take a single detrimental event to reverse this momentum.