The US housing market, grappling with historically high prices and rising mortgage rates, has seen a significant slowdown in residential sales. However, the luxury segment remains robust, highlighting a stark contrast between affluent buyers and the broader market struggles.
Recent data reveals a challenging landscape for the housing market. New home sales declined slightly in June, following a sharp 15% drop in May, and transactions for previously owned homes fell for the fourth consecutive month. Despite this overall downturn, the luxury market defies the trend. Homes priced over $1 million were the only segment to experience a sales increase in June, according to the National Association of Realtors.
The surge in luxury sales is partly due to the high mortgage rates, which hover around 6.8%—a stark increase from the 3% rates prevalent from late 2019 to early 2022. For wealthy buyers, who often purchase homes with cash, these elevated rates pose no barrier. “I can’t remember the last time I heard a buyer talk about financing,” said Lisa Rooks Morris, a luxury real estate agent in Sarasota, Florida. “They all come in with cash.”
This cash-driven demand has propelled Toll Brothers Inc., a leading luxury homebuilder, to new financial heights. The company’s shares have surged nearly 160% since the beginning of 2023, positioning it as the second-best performing publicly traded US builder over the past six months. “Historically, higher-priced homes are the first to feel the impact when interest rates rise,” noted Ali Wolf, chief economist for Zonda. “We aren’t seeing that today, thanks to high home equity and a strong stock market.”
According to Redfin, 45% of high-end homebuyers used all cash as of the end of the first quarter—an all-time high for the past decade. This trend is supported by substantial stock portfolios, sales of commercial real estate, and inherited wealth.
Conversely, entry-level buyers face increasing difficulties. Rising mortgage rates and inflation have strained personal savings, and lower-income borrowers struggle with loan approvals amidst rising credit delinquencies. “The bifurcation in the housing market reflects the broader economic divide,” said Ben Ayers, senior economist at Nationwide. “While asset values surge for some, many others are barely managing.”
The luxury sector’s growth is evident in communities like The Regency at Ten Trails in Black Diamond, Washington, where Toll Brothers’ properties start at $600,000 and often exceed $1 million. Over half of the buyers are paying cash, and sales agent Kristi Brewer reports heightened demand recently.
In Florida, Morris sold a $7.75 million home within 72 hours of listing it. She observes a shift from the pandemic’s frenzied bidding wars to a market with more time for contemplation and negotiation due to an increase in quality inventory.
Despite the luxury market’s success, the homebuilding industry is grappling with how to address the need for more affordable housing amidst rising construction costs. David Weekley Homes, for instance, faces challenges in building homes under $400,000 due to escalating land, labor, and material costs. “Every builder is trying to push into more attainable homes,” said Chris Weekley, president of David Weekley Homes. “But the risk is that cheaper land often means going further out, which carries its own risks.”
Overall, while the luxury housing market remains buoyant, the broader sector continues to struggle, underscoring a deepening divide in the US real estate landscape.
