MARKET IN PERSPECTIVE

MICHAEL ALTNEU Vice President of Global Luxury, Coldwell Banker Real Estate LLC

How do you analyze a market that’s in a state of flux?

Typical real estate analysis is based on year-to-year comparables. But by any measure, 2021 was a year without precedent. Mass wealth creation and lifestyle changes during the pandemic spurred a once-in-a-generation homebuying boom characterized by rapid sales, bidding wars, and record price appreciation. Now the luxury property market is transitioning, making it nearly impossible to predict.

Backdrop of Uncertainty

Uncertainty has been a theme in 2022. Questions have swirled about whether the U.S. economy is slowing or not. The Federal Reserve has spent the year hiking interest rates to curb inflation. Borrowing costs are now at the highest they’ve been since 2008.¹ Geopolitical events, such as the war in Ukraine and its resulting energy crisis, have begun to impact some markets globally. High-net-worth individuals, while more insulated from economic downturns than the general population, are a naturally cautious bunch and have begun to temper their homebuying compared to 2021.

These factors are all playing out now in high-end markets across the U.S. to varying degrees. 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.

Trending Toward Balance

We can see that the pendulum is swinging toward balance. While 2022 luxury home data is still showing that we are in a seller’s market comparable to 2021, inventory levels have risen and sales have decreased yearover-year. Decreasing sales ratios each month also offer a snapshot of where the luxury property market could be headed.

Sales Ratios Explained

Sales ratio measures the monthly sales against the remaining active listings at the end of each month. 21% or greater is a SELLER’S MARKET, less than 21% to 15% is a BALANCED MARKET and 15% or below is a BUYER'S MARKET.

Source: Institute for Luxury Home Marketing

2022 In Context

While 2022 market statistics show declining sales and increasing inventory compared to 2021, these numbers need to be put in context. As previously noted, 2021 was an extraordinary year, and that level of feverish buying activity is unlikely to be repeated in our lifetimes. But when you compare 2022 to 2019 – a benchmark year – inventory is actually significantly lower and sales are higher. Prices have also continued to rise for the first eight months of 2022, albeit at a slower pace than 2021. This could change as rates continue to notch up – but even so, some luxury real estate professionals may feel that a reset is needed. Those who have lived through a few real estate cycles argue that 17% annual price appreciation wasn’t sustainable. Perhaps some of them are even eager to see the market return to a more balanced state with a healthy annual price appreciation of 3% to 5%. Their buyers may end up happier since they may finally have an easier time finding a home.

The Big Picture

Despite the headlines, the luxury property market is still in a strong position.

Stock markets may have fallen by 20% in 2022,² reducing the overall wealth of individuals with a net worth of over $5 million by 12% from 2021, per Wealth-X. But stock volatility could actually push the affluent investor toward real estate. After all, people often want to buy tangible assets as opposed to stocks or bonds during challenging economic times.

The latest figures from Wealth-X also reveal a silver lining if you understand the data. While it looks like real estate asset allocation has remained unchanged from 2021 to 2022, most of the loss can be attributed to stock options, such as REITs, rather than bricks and mortar real estate.

The survey of high-net-worth individuals that the Coldwell Banker Global Luxury program undertook in collaboration with Censuswide also reinforces their reliance on real estate for overall wealth building and investment. Nearly 80% of them agreed that real estate is a safe investment.

Perhaps many of them recognize that real estate consistently increases in value over time. Their homes today are worth more than they were a year ago. All of this not only emphasizes the underlying strength of the luxury property segment, but also how much the affluent are willing to play the long game when it comes to their lifestyle and real estate investments today. They may not see the same record profits as they saw in 2021, but over the next few years, prices are expected to appreciate. There is still great opportunity awaiting luxury homebuyers and sellers.

Freddie Mac House Price Appreciation 2010-2023

the next chapter

To help us sort through a market that appears to be rapidly shifting direction after two unprecedented years of homebuying, we called upon a range of experts for this report. We talked to mortgage insiders and wealth advisors, as well as luxury real estate veterans around the globe. They helped us uncover six trends that will guide the next few years. Together with the Censuswide/

Coldwell Banker Global Luxury survey and our collected real estate data from the Institute for Luxury Home Marketing, their insights offer a rare glimpse into the minds of today’s affluent consumers and a barometer on what will be driving luxury real estate decisions in the near future.