Some luxury home buyers have gone into “shock mode” due to climbing interest rates and a reeling stock market.
Federal Reserve’s Rate Hike of 0.75% = Biggest Hike Since 1994
The Federal Reserve’s decision to raise interest rates by 0.75%, the biggest rate hike since 1994, will increase the Fed’s benchmark federal-funds rate between 1.5% and 1.75%, according to the Wall Street Journal. Some industry experts anticipate interest rates to hit at least 3% by the end of 2022.
At the Fed’s news conference at the close of its June 14-15 meeting, Federal Reserve Chairman Jerome Powell said there could be another rate hike between 50 and 75 basis points during the Fed’s subsequent meeting at the end of July.
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We’ve already seen the effect of rising interest rates on “mainstream” market tiers with an almost immediate decrease in home sale volume. We’re also more than likely to see a similar effect among some luxury buyers.
Stock Market Skids into Bear Territory
The same week the Fed increased interest rates by 0.75%, the stock market fell -20% from its peak to flip from being designated a bull (bull horns point up) market to a bear (bear claws point down) market for the first time in a decade.
According to Lawrence Yun, chief economist at the National Association of REALTORS® (NAR), “The stock market has put a lot of luxury buyers into shock mode. Now they are saying, ‘We can not buy that second home’ or ‘upgrade from a $2MK property to a $4M home… (luxury buyers) are dealing with two big events occurring simultaneously.”
Transitioning Financial Strategies
Emily Irwin, senior director of advice and planning for Wells Fargo Wealth and Investment Management, believes that people on the cusp of the luxury market will be more affected by the latest (and forthcoming) interest rate change than ultra-high-net-worth people.
In terms of the housing market, potential “on-the-cusp” lux buyers who had significant buying power at the beginning of 2022 now have significantly less buying power due to higher mortgage payments and increased borrowing costs. NAR’s Yun said, “…some buyers will see mortgage payments go up by thousands a month…” and may keep some buyers from buying within the luxury tier.
Irwin said that entry level luxury buyers have been able to take out mortgages over the last few years when interest rates sat at record low levels while allowing their “leftover” cash to obtain higher yields in the stock market. Current higher and recurrently climbing interest rates are likely to change that financial strategy.
Irwin added, “I think we’ll see a decrease in clients obtaining mortgages as part of an investment strategy.” Yun agreed by saying that investors need a return that’s higher than 6%, a much more challenging scenario with a slipping, bearish stock market.
Alternative Lending Strategies for Investors
Some investors, particularly inter-generationally wealthy investors, may turn to intra-family loans in order to escape higher interest rates. Irwin said, “It will be interesting to see if high-net worth buyers in the luxury space turn to their parents or even their grandparents for financial wealth.
Other lux buyers and sellers as well may simply readjust their expectations. Some lux buyers may become more flexible about “must-haves.” Additionally, some lux sellers may become more flexible about “must ROIs” as higher borrowing costs will most likely decrease demand.
Normalizing Housing Boom
Jonathan Miller, president and CEO of Miller Appraiser and author of Douglas Elliman market reports in regions including Boston, New York, South Florida and California, said, “We’ve had one of the biggest housing booms of the modern era…a frenzy that was not sustainable.
“This (normalizing) is actually a good thing in the long run for housing. In most of the markets that I cover, overall bidding wars accounted for anywhere from 25 to 75% of the markets that we track and that is not a sustainable condition,” continued Miller.
Inventory, already rising +17% y/y the week ending June 17, could have more time to recover with less buying power driving sales, according to Realtor.com. And growing inventory could re-engage potential buyers who had dropped out of the market due to a lack of quality supply.
Additionally, as international travel normalizes, home sales to foreign buyers may also help spur sales, according to NAR’s Yun.
Thanks to Barrons.
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