Inman Connect New York delivers the perfect blend of outside-the-box thinkers, cutting-edge leaders, and hard-working, successful agents. Join us Jan. 24-26 for crucial content, education, and networking opportunities to help you thrive in today’s changing market. Register here.
The luxury real estate market is in a period of transition, according to Coldwell Banker’s 2022 Trend Report.
Following the boom of 2020 and 2021, high-net-worth buyers are shifting their gaze away from real estate ever so slightly, amidst increasing interest rates, inflation and greater economic uncertainty, according to the report released on Monday.
But that doesn’t mean luxury buyers have completely abandoned the market either, Coldwell Banker’s report notes. It does, however, mean that new buyer trends are emerging, and the report compiled in collaboration with surveys and studies from Censuswide, the Institute for Luxury Home Marketing and Wealth-X identifies six new trends for 2022.
“Uncertainty has been a theme in 2022,” Michael Altneu, vice president of Global Luxury at Coldwell Banker, said in the report, listing rising interest rates, inflation and geopolitical uncertainty as factors making luxury buyers more cautious.
“These factors are all playing out now in high-end markets across the U.S. to varying degrees,” Altneu continued. “The data varies widely between locations, price points, and property types muddying the forecast waters. Are we in a buyer’s market? Are we in a seller’s market? A lot of it depends on where you look, and what you are looking at.”
The unconventional buyer’s market, demand for smaller properties, second-guessing prior purchases, a desire for stability, buying internationally, and seeking out creative financing are all emerging trends in 2022, the report indicates.
Not exactly a buyer’s market
Demand may not quite be where it was at the height of the pandemic housing boom, but inventory is still not able to meet demand levels from luxury buyers, which is unusual for the paradigmatic buyer’s market, Coldwell Banker’s report notes. New luxury listings in July and August 2022 were down 20 percent from May and June 2022, and only up 7 percent from July and August 2021.
The cause of this lack of listings may be due to sellers taking summer vacation, or an unwillingness to buy a home at a higher mortgage rate. Or they may have already moved earlier in the pandemic.
Likewise, the market’s price stabilization through the past few years is also unusual for a typical buyer’s market, the report said, with prices rapidly rising and predicted to hold — and even continue growing — in the next few years.
The fact that these considerations also vary widely from market to market subvert the nature of a typical U.S. buyer’s market. For instance, as of August 2022, Boston and Cincinnati were becoming strong seller’s markets, while Coeur d’Alene and Miami were clearly more favorable to buyers.
The pandemic brought out a demand in luxury buyers for mega homes that could fulfill their every need. But luxury buyers today are thinking smaller — using their purchasing power to buy smaller secondary homes or investment properties.
An analysis of 20 top U.S. markets by the Institute for Luxury Home Marketing showed that smaller single-family luxury homes (of 2,500 to 3,500 square feet) sold 18.6 percent faster than larger single-family luxury homes (of 4,500 to 5,000 square feet) between April and August 2022. In 2021, however, the larger homes sold 21.6 percent faster than the smaller ones.
Greater inventory levels for these smaller properties, a return to city life, less of a need for work-from-home and school-from-home spaces, and higher prices may all be contributing to this trend.
“If they are cash buyers, they may lower the price point they are looking in if the property prices are not to their liking or if their cash was impacted by the recent stock market fluctuations,” Jill Hertzberg of the Jills Zeder Group said in the report.
A touch of buyer’s remorse
The frantic market conditions that came into play in 2020 and 2021 led some buyers to make purchases a bit too hastily — and come to regret those decisions later. As markets continue to shift more into buyers’ favor, the luxury buyers no longer happy with their pandemic purchases may be ready to relocate again.
Shifting buyers needs are likely a major cause for remorse, with homeowners no longer needing the space they once did during the height of the pandemic, or no longer wishing to live in a remote oasis that seemed ideal for sheltering in place in 2020. Others, may now be compelled to return to a physical office by their employers and need to relocate to be closer to work.
With national and global markets at some of their most unstable points in decades, high-net-worth buyers are looking to real estate as a stable investment now more than ever, Coldwell Banker’s report stated. But aside from it merely being a financial investment, luxury buyers are also seeing real estate as a place that can provide emotional and psychological stability for themselves and their families during tumultuous times.
In line with this theme of seeking stability, the report noted that buyers are returning to traditional luxury markets that are known to withstand the test of time. Some are also looking to geographical areas that are less likely to be negatively impacted by climate change in the coming years.
That means that high-net-worth homeowners are putting their money in real estate in luxury market standbys like New York, Los Angeles, San Francisco, Chicago and Boston. But luxury buyers — especially those of younger generations — are also targeted places less vulnerable to climate change, with almost one-third of respondents to a 2021 Forbes Home survey stating that worsening weather conditions as one of their reasons for moving.
After being severely limited in their international buying power over the last fews years of the pandemic, high-net-worth buyers are now ready to use their buying power abroad again — and exchange rates are much more favorable to Americans this time around too. In addition to lifestyle preferences, luxury buyers are looking abroad again in order to diversify their investments.
The number of high-net-worth Americans who own investment properties abroad is expected to increase by 14 percent from 2021 and by 29 percent from 2019 by the end of 2022, according to Wealth-X’s latest data. If those estimates prove true, about 61,000 overseas properties would be owned by U.S. citizens in 2022.
The majority of high-net-worth buyers are looking to Central America, at 23 percent of buyers (the most sought after countries in the region are Belize, Costa Rica, Honduras and Panama). After that, 20.5 percent of buyers are looking to Canada and Mexico, 20.4 percent are looking to Asia, 18.1 percent are looking to South America, 14.1 percent are looking to Europe, 10.8 percent are looking to Australia and New Zealand and 9.4 percent looking to the Caribbean.
Exploring creative financing
With interest rates now much higher than they were one year ago, high-net-worth buyers are exploring new ways of financing their real estate investments. Not surprisingly, all-cash transactions are expected to increase this year, but that’s not all high-net-worth buyers are considering.
Utilizing margin or stock portfolio loans and private bank loans (which might include zero deposit mortgages, multiple loans and interest-only mortgages) will become increasingly popular among the wealthy, Coldwell Banker’s report posited.
Adjustable rate mortgages (“ARMs,” which have a fixed interest rate for a certain number of years and then adjust to the current market rate) and seller carry second mortgages (in which a seller acts as the bank/lender and carries a second mortgage on the property that the buyer pays down along with their first mortgage) may also become attractive options, the report suggested.