House Hunters
Although interest rates and inflation continue to hamper residential sales, the luxury sector is thriving
IT DIDN’T TAKE long after the Bureau of Labor Statistics released its Consumer Price Index in February for the stock market to tumble. The Dow Jones Industrial Average sank by more than 500 points after the opening bell and ended the day down 524 points—its biggest one-day percentage drop in nearly 11 months. The meltdown was fueled by data showing U.S. consumer prices increasing above forecasts in January and pushing back market expectations of imminent interest-rate cuts.
While stocks have recovered some since then, the underlying factors keeping inflation stubbornly high won’t surprise anyone shopping for a new home. Despite slowing sales, real estate prices remain high and are forecast to continue rising through much of 2024. This follows a trend over the last two years where the cost of housing continues to contribute heavily to high inflation. “While appreciation is expected to slow, home prices will continue to extend to new highs entering the typically busy spring homebuying season,” says Selma
Hepp, chief economist for housing data firm CoreLogic.
Rising property prices combined with slowing sales presents an economic conundrum for homeowners and real estate investors. While higher prices means more value, it’s also stalling the Federal Reserve’s plans for lowering mortgage rates, which reached 6.77 percent in February after peaking at 7.79 percent last year—the highest level since late 2000. (Just two years ago rates hovered at 3.92 percent.)
Those higher borrowing costs are keeping many first-time
buyers on the sidelines while also discouraging homeowners who locked in rock-bottom rates two or three years ago from selling their homes. So far this year, mortgage applications to buy a home are down in more than half of all states compared to a year earlier, according to mortgage giant Freddie Mac.
“Homeowners have benefited from housing wealth accumulation. However, many homebuyers have been shocked at high housing costs, with a typical monthly mortgage payment rising from $1,000 three years ago to more than $2,000 last year,” says Lawrence Yun, chief economist for the National Association of Realtors. The realty group reported existing single-family home prices climbed 3.5 percent on an annual basis in the fourth quarter of last year, to a national median price of $391,700.
“This doubling in housing costs for recent home buyers is not included in the official Consumer Price Index inflation calculations and contributes to the sense of dissatisfaction about the economy,” adds Yun. Despite those stubborn Consumer Price Index figures, most economists expect inflation to continue falling this year—eventually reaching the Fed’s year-overyear target of two percent. That would set the stage for rate cuts later this year.
Chair Jerome Powell said the Federal Reserve remains on track to cut interest rates three times this year, a move that’s expected to begin as early as May. He also said the nation’s job market and economy are strong, with no sign of a recession on the horizon.
“The economy is in a good place,” Powell told CBS News. “And there’s every reason to think it can get better.”
That kind of bullish economic outlook is already helping one important sector of the nation’s housing market: luxury home sales. Prices at the upper end of the market are hitting all-time highs, despite an otherwise mixed housing landscape.
A typical U.S. luxury home sold for a record $1.17 million in the fourth quarter of 2023, up 8.8 percent from the same period a year earlier, according to a report by real estate services company Redfin. Nonluxury home prices increased at half that pace. The Realtor defines luxury homes as those estimated to be in the top five percent of their respective metro area based on market value. The increase in luxury prices, along with improving sales, signals that affluent homebuyers are becoming more active.
“We’ve seen very little letup in interest from wealthy buyers,” says Joaquin Stearns, a senior vice president at Extell Development Company. Among the firm’s stable of luxury properties is Central Park Tower, a skyscraper on Manhattan’s Billionaires’ Row that ranks as the tallest residential building in the world.
A penthouse inside the building recently sold for approximately $115 million. Spanning the building’s 107th and 108th floors, the apartment measures 12,560 square feet with seven bedrooms and two terraces.
Central Park Tower recently listed its first turnkey unit to cater to expanding demand. The full-floor apartment on the 113th floor lists for $63.5 million and spans 7,074 square feet with 360-degree Manhattan views. Luxury real estate developer Shvo is also seeing a sales boom in “sign today, sleep there tonight” turnkey units at its Mandarin Oriental Residences in Manhattan and Beverly Hills.
“Demand is strong and buyers at this level recognize the value of these properties,” says Stearns. “We see this sales trend continuing through 2024.”
“Home prices will continue to extend to new highs entering the typically busy spring homebuying season.”