Luxury Homes in 2017: A Buyer's Market

If you're in the market for a luxury home, this could be the year to buy one. Read on to learn how to recognize the signals of great buying conditions. 

Your Investment Should Hold Its Value

In the first quarter of 2017, the cost of an average luxury home rose to an average of $1.65 million, a 4.2% increase over the first quarter of 2016, according to data compiled by Redfin. (Redfin defines the luxury market as the top 5% of homes; average sale price for the 95% was $307,000). Washington, D.C., saw an impressive 32.6% year-over-year growth. President Trump may have had something to do with that, Redfin noted, since two of his appointees, Treasury Secretary Steve Mnuchin and Commerce Secretary Wilbur Ross, purchased the two most expensive homes in the D.C. market.

Other top cities include St. Petersburg, Fla., with a 28.5% increase in purchase price; Portland, Ore., at 23.5%; and Paradise, Nev., with a 22.4% increase.

Not every market fared well. Bargains still abound in some locations. Delray Beach, Fla., saw a 26.4% decrease in prices; Clearwater, a city neighboring St. Petersburg, Fla., saw a reduction of 11.3%; and Alexandria, Ga., fell 9.7%.

Mortgage Interest Rates: Expected to Rise

Although the market saw a strong start to 2017, some watchers are concerned that the Federal Reserve’s raising of interest rates may put the brakes on the luxury market. Other say, that probably won’t happen for a while

Buyers of luxury homes are less dependent on mortgages than purchasers of lower-priced homes, and for those who do borrow, a 0.25% increase is inconsequential. A loan for an $800,000 home at a 4% interest rate, for example, comes out to about $3,819 for principal and interest. At 4.25%, the monthly payment is around $3,936 – a mere $117 per month extra. For somebody buying a luxury home of this size, $117 isn’t going to affect that person’s buying decision.

However, once interest rates reach 5%, that could mean an increase of $500. An increase of that size does start to affect buying decisions and may soften the market.

Price and Inventory Trends: A Buyer's Market

Prices have been mostly flat in 2017 while inventory continues to rise, according to the Institute for Luxury Home Marketing, a company that tracks the latest trends in pricing and inventory. In its May 2017 report, the ILHM placed the overall market action at 29. Anything below 30 is considered a buyer’s market based on inventory and sales trends.

Since the beginning of 2017, the price per square foot has fallen from about $435 to $409 and the percentage of inventory with price decreases stands at 36%. National inventory has increased from a 90-day average of about 20,600 homes to its current level of just over 23,000.

Is Now the Time?

It depends, say experts. If you’re a cash buyer, waiting a few years might land you some incredible deals. If interest rates rise substantially as predictions suggest, mortgage rates will rise to the point where there’s too much inventory on the market and prices of luxury homes will fall, perhaps significantly. That will put cash buyers at an advantage.  (Read: Buying a Home: Cash vs. Mortgage.)

If you’re financing your purchase, getting in now when interest rates are most likely the lowest they’ll be for a long time is probably the better move. And if you’re not tied down to any particular city, looking at luxury listings outside of the higher priced communities will give you more house for less.

The Bottom Line

Although some believe that the market is flattening and may soften over the next year or two, all reports show a luxury home market that is quite healthy. If you’re looking for a home that’s a little nicer than the average, and you’re planning to finance, there may not be a better time than now. (For more, see: Tips for Buying Luxury Real Estate and Ultra-Luxury Real Estate: What’s Hot, What’s Not.)